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Five Star Hotels in China Suffer Due to PRC Government's Crackdown on Officials' Extravagance

17 February 2014

Traditionally the luxury hotel sector in China has benefitted enormously from officials' expenditure on functions and hospitality. Recent reports, however, indicate that government policies and new rules and regulations restricting officials’ hospitality expenditure may be having a very serious impact on this revenue stream.

The "Eight Stipulations" for improving officials' working style and tightening relations with the people were finalised by the Political Bureau of the Central Committee of the Communist Party of China (CPC) in December 2012. Since then, the PRC central government has promulgated a number of regulations to implement the Eight Stipulations, aimed at controlling government spending more strictly and curbing extravagance.

These regulations include, among other measures, the Administration Measures for Conference Expenses of Central and State Organs (《中央和国家机关会议费管理办法》) and the Administration Measures for Travel Expenses of Central and State Organs (《中央和国家机关差旅费管理办法》), both of which took effect on 1 January 2014.

According to the Measures for Conference Expenses, conferences of central and state organs cannot be held in five star hotels unless those meetings are approved by and convened in the name of the Central Committee of the CPC and the state council. Furthermore, when conferences have fewer than 50 attendees, all of whom are local, they should in principle be held in the organiser's meeting room rather than in a hotel, and no accommodation can be arranged for the attendees. The measures also prohibit the use of upscale suites as conference accommodation and the serving of expensive dishes and liquor as part of conference meals.

The Measures for Travel Expenses stipulate that when travelling on official business, only officials at ministry level (部级) or equivalent positions can stay in junior suites, while other officials at and below department and bureau level (司局级) can only stay in single or standard rooms. The Ministry of Finance will also issue limits on the amounts that officials travelling on business are allowed to pay for accommodation in different locations.

The China hotel business has certainly been affected as a result of the above campaign, especially five star hotels. Reports indicate that this is particularly the case for those five star hotels in third- or fourth-tier cities which are more dependent on government business. High-end restaurants and the high-end liquor market are also affected. Press reports appearing late in 2013 claimed that more than 50 five star hotels have requested a downgrade in their rating, and many more hotels which had been contemplating applying for a five star rating have postponed their applications in an effort to preserve government business. It has also been reported that some high-end hotels are providing low-cost services including buffet and group-purchasing services in response to the decline of business. Of course, for many years, hotels have aspired to be rated five star, and some hotels on major sites have even been "required" to be five star as a condition set by the government to secure the Land Grant. An awkward tension has therefore arisen for some hotel owners/developers.

It is yet to be seen exactly how dramatic the effect of these policies will be and in particular if any high-end hotels or restaurants will be forced to close as a result of this campaign. However it is clear that the government's policies are having a significant impact on F&B revenues for luxury hotels in the country. This is no storm in a tea cup (or wine glass); it is another real problem for some luxury hotels in China at a time when many hotels are already facing challenging market conditions.

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