China has opened its travel agency market to foreign investors years ahead of the schedule it agreed with the World Trade Organization (WTO).

The country promised to allow the establishment of foreign-controlled travel agencies from December 11, 2004, when it entered the WTO three years ago.

And foreign investors will be permitted to set up wholly-funded companies by the end of 2007.

But China has lifted the ban on foreign-invested travel service providers much earlier than promised.

Last June, the China National Tourism Administration (CNTA) and the Ministry of Commerce issued a rule, giving a green light to overseas controlled or wholly owned travel agencies.

On December 1, 2003, approved by the CNTA, Jalpak International China Co Ltd, the first fully foreign-funded travel agency, and TUI (Touristik Union International) China Travel Co, the first Sino-foreign tourism joint venture controlled by foreign shares, was established.

Statistics indicate the CNTA approved the establishment of five fully foreign-funded travel agencies and three overseas-controlled agencies by the end of August.

"The early opening of the domestic tourism market is, on the whole, a good thing for the industry," said Li Mingde, deputy director of the Tourism Research Centre of the Chinese Academy of Social Sciences.

The first benefit is that an open market allows domestic travel agencies to be better integrated into the international tourism market, Li said.

When coming into the Chinese market, foreign investors bring capital, professionals and advanced management concepts, as well as considerable tourist resources, into the country.

In addition, the entry of foreign investors helps improve the management and services of domestic tourism agencies, Li said.

"Through co-operation with foreign counterparts, we can gain advanced management experience, adjust services in line with international practice, and directly promote sales abroad, which will all help the company's further development," said an unnamed official of Guangdong China Travel Service, which signed a deal for complete co-operation with TUI China Travel Co earlier this year.

The establishment of foreign-controlled and fully owned travel agencies brings competition to the market as well.

But the impact will not be too adverse in the near term, said Li from the research centre.

Although the market has been open for more than one year, real competition has not shown to date, due to different management concepts between domestic and foreign players and a de facto undeveloped tourism market, Li said.

At present, foreign-funded travel agencies focus their businesses mainly on inbound business tours, which is not the major profit source for domestic firms.

Under the rule announced last June, foreign-controlled or wholly funded travel agencies are not permitted to arrange outbound tours for Chinese mainland citizens to foreign countries or to the Hong Kong and Macao special administrative regions or Taiwan Province.

Their business is restricted in inbound tours and domestic tours only.

The rule also requires overseas applicants applying for a controlled joint venture must have an annual business turnover of at least US$40 million.

Applicants who want to set up a wholly owned travel agency must have an annual business turnover of at least US$500 million.

Meanwhile, the travel agencies must have a registered capital of at least 4 million yuan (US$483,000).

These restrictions, as well as small profit margins driven by price competition in the market, make investing in China's tourism market less appealing.

"Many foreign companies are still watching the market," Li said.

When the domestic tourism market opens wider in the future, there will be more foreign players, as China is one of the biggest tourism markets in the world, he said.

According to the strategic forecast released by the WTO, China will become the largest inbound destination and the fourth largest outbound tourist country by 2020.

Total tourism income will be more than 3.6 trillion yuan (US$434 billion), about 8 to 10 per cent of China's gross domestic product that year, and the number of inbound tourists will reach 210 million.

"Foreign investors are much more interested in the currently restricted outbound tours, which are more profitable than inbound tours," Li said.

At present, many foreign travel agencies are trying for a share of China's huge outbound tour market, which was ignited when European countries opened to Chinese tourists, through co-operation with domestic firms.

Facing the increasing competition, domestic tourism companies have also begun to form coalitions.

On April 17, China Beijing Quanjude Group and Beijing New Yansha Group, two major tourism companies in the Chinese capital, merged into the Beijing Tourism Group (BTG).

The merger resulted in a new company with assets exceeding 15 billion yuan (US$1.8 billion).

In the latest moves, China International Travel Service officially acquired the China Duty Free Group to form the CITS (Group) Corp on November 10, to enhance enterprise competitiveness in the international tourism market.

The group is planning for a listing in Hong Kong within a year.

"Further development of the tourism industry and increasing competition following China's WTO entry calls for large tourism companies," said BTG Chairman Duan Qiang.

Duan said there is a great gap between domestic firms and their international counterparts, but he is confident domestic firms can provide services more suitable to Chinese customers.

"We should learn from our foreign rivals and adjust to international operation rules," Duan said.

"Brand building is important for domestic travel agencies in dealing with foreign competition," said Li.

The best way for them to succeed is for the companies to co-operate and build a bigger market together, Li said.