(Bloomberg) -- Even teddy bears and K-Pop stars are feeling the effects of the diplomatic strain between South Korea and China.
On the resort island of Jeju off the southern tip of the Korean peninsula, about 85 percent of the foreign visitors last year came from China. They piled into tour buses to see such sights as a botanical garden, a teddy bear museum and a hall full of singing holograms.
That was before South Korea decided to host the U.S.' Thaad missile-defense system. China views the deployment as a security threat and is discouraging tourists from taking Korean vacations.
“We've seen about a 20 percent decline in Chinese tourists so far this year,” said Byun Chang-sik, a general manager at the Jeju Teddy Bear Museum, where the stuffed animals strike poses resembling The Beatles and Mona Lisa. “There's nothing we can fix on our own.”
Read more: Why Thaad bothers China -- a QuickTake Q&A
Worse is to come. The China National Tourism Administration ordered travel agents to stop selling tour packages to South Korea starting March 15, according to the state-run Korea Tourism Organization. Jeju received almost 3.1 million Chinese visitors last year.
“This will strike a fatal blow,” said Won Hee-ryong, governor of Jeju Special Self-Governing Province. Bus-rental companies, hotels and travel agencies will suffer along with the tourist attractions, he said.
About 111,000 Chinese tourists canceled trips to Jeju scheduled to start after March 15, the local government said Tuesday. Also, about 20 Chinese auto companies withdrew from an electric-vehicle trade show in Jeju scheduled for March 17-23, the organizer said.
Gangnam Style
The Korean government offered some emergency relief on Tuesday. The trade ministry will provide loans of as much as 1 billion won ($872,000) to smaller companies affected by China's curbs, according to a statement.
The Chinese reaction is thinning crowds at an attraction dedicated to Korean pop music, one of the nation's most prominent soft-power exports. The Play K-Pop museum opened in 2015 and features a concert hall for singing holograms, as well as selfie-taking areas with images of famous singers including the artist known as Psy, who released the 2012 international hit “Gangnam Style.”
The museum was welcoming about six or seven Chinese tour groups a day, said Kang Oh-hyun, a museum official. “We've suffered direct damage,” Kang said. “It is hard to receive even a single Chinese group-tour bus these days.”
The effects of the spat are also being felt on the Korean mainland. China's major internet-streaming companies pulled popular Korean programs, which can include soap operas and historical dramas, off their platforms, China's state-run Global Times newspaper reported March 5.
Japan Lesson
Government pressure could eventually hurt sales of Korean cars, mobile phones and chemicals, said Kim Kyung-hwan, a strategist at Hana Financial Investment Co. in Seoul. China is the largest market for Hyundai Motor Co., according to data compiled by Bloomberg.
“We're estimating a 5-to-10 percent decline in exports to China,” Kim said, speaking of the overall market and not just cars. “Even if China withdraws all the restrictions, it will take six months to a year for things to improve.”
When China was locked in a dispute with Japan in 2012 about competing claims to uninhabited islands near Taiwan, angry Chinese took to the streets.
Japanese automakers' sales in China took a year to recover. The Philippines and Taiwan also experienced the economic wrath of the Chinese government.
“China is more and more interested in using the power of the purse of its consumers as a force-multiplier for its diplomatic pressure,” said James Reilly, associate professor in the University of Sydney's department of government and international relations.
The Thaad system, intended to counter a potential North Korean attack, is being deployed in South Korea on land provided by the Lotte Group conglomerate. North Korea fired four projectiles on March 6.
Shares of unit Lotte Shopping Co. have declined 8.4 percent since the government disclosed the land deal Feb. 27. After the announcement, Lotte's Chinese website was hacked. Chinese authorities suspended the operations of 39 Lotte Mart stores because of alleged fire-safety rule violations, Lotte said Tuesday.
Consumer companies whose products can be replaced easily by other brands also are suffering. About half of South Korean cosmetics makers' profits come from sales in duty-free shops popular among Chinese travelers, said Catherine Lim, a Bloomberg Intelligence analyst in Singapore.
‘Dark Tunnel'
Seoul-traded shares of Amorepacific Corp., which makes Laneige cosmetics and Ryo hair-care products, fell to a 52-week low on March 6. The stock has declined 18 percent this year, compared with a 3.3 percent increase for the benchmark Kospi index.
South Korea also is a destination for Chinese tourists seeking medical procedures like nose jobs, eyelid surgery and dental implants.
Osstem Implant Co.'s China sales in the fourth quarter were an estimated 16.9 billion won, or about 18 percent of total revenue, according to Shinhan Investment Corp. Shares plunged to a 52-week low on March 3 and have declined 13 percent this year.
Down the street from Jeju's Teddy Bear Museum, septuagenarian restaurant owner Jeong Jong-soo is worried about her future after China implements the new travel restrictions on March 15.
“We cannot endure this situation for long,” she said. “I feel I am walking through a dark tunnel.”
To contact the reporters on this story: Bruce Einhorn in Hong Kong at beinhorn1@bloomberg.net, Sohee Kim in Jeju at skim847@bloomberg.net, Kyunghee Park in Singapore at kpark3@bloomberg.net.
To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net, Brian Bremner at bbremner@bloomberg.net, Michael Tighe, Adam Majendie
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