The luxury hotel sector in China is now facing the triple threats: President Xi Jinping’s austerity and anti-corruption measures, China’s economic slowdown, and an oversupply of hotel rooms.

　　Just a few years ago, the luxury hotel business was booming in China—a steadily rising economy was producing droves of deep-pocketed business travelers, and government officials were quaffing top shelf Bordeaux wine and running giant tabs in hotel banquet rooms.

　　All that has changed with Chinese president Xi Jinping’s “four dishes and a soup” austerity plan, as government officials facing public shame or worse for spending public funds on lavish banquet room entertainment, or even wine with lunch.

　　The crackdown could not have come at a worse time for China’s luxury hotel industry. The economy is cooling, which is eating into demand and profits, while oversupply is a growing problem thanks to a glut of top-end hotels opening in coming months. The triple attack—austerity, slowdown, and oversupply—could ravage mainland China’s luxury hotel market and result in plummeting room prices and occupancy rates.

　　China currently has about 110,000 luxury hotels rooms, and another 50,000 are in the pipeline, according to research firm STR Global. Half of the new rooms will be coming on line in the next 18 months, many of which will be in cities like Tianjin and Sanya that are not a draw for international tourists, making shrinking domestic demand a major worry.

　　“We’re seeing a huge amount of new supply coming on,” said STR managing director Elizabeth Winkle. “The problem is demand is not keeping pace.” In the first six months of this year, demand for luxury hotel rooms in China increased 4%, but supply was up 7.4%.

　　China’s overall hotel revenue through April of this year was 16.4% lower than the year before, according to the latest information from the China Hotel Association, in part because government meetings in hotels have dropped almost 40%. Food and beverage sales have declined by 10% to 20% in Beijing, according to managers at luxury hotels there.

　　Occupancy rates, already lower in China’s luxury sector than the rest of the world, have been shrinking as the economy’s breakneck growth cooled at the same time new five star hotels were being built. They fell from 59.5% for the first six months of 2012 to 57.6% this year, according to STR Global. That compares to occupancy rates of around 80% for locales like Singapore and Hong Kong, and well below the industry standard 70% rate where five-star hotels usually break even.

　　Concerns that hotels were overbuilding in China have been raised many times in recent years. But local governments and developers continue to woo international hotel chains to participate in big commercial development projects, keen for the tax revenue and profits they can make off of other businesses, respectively. “”Most hotels are losing money,” one Shanghai developer told our reporter. “If you build a skyscraper, mall or luxury hotel in a third- or fourth-tier city, in return the local government will offer discounts on the price of land or tax concessions.”

　　Most big international hotel companies have brushed off concerns about the combined impact of austerity measures and an economic slowdown, and most don’t break out China results so it’s hard to track the exact impact. Still, warning bells can be heard: on July 29, Shangri La Asia warned of a “material decline” in profit thanks to its mainland China hotels, and revenue at Hyatt Hotels suffered from “weak market conditions in China,” the company said in second-quarter earnings release on July 31, warning demand in China as well as India “will be volatile” over the short-term.

　　Xi’s austerity program and the slowing economy have spelled trouble for many businesses in China, including luxury cars, watches and handbags. But those businesses have a strong incentive not to offer discounts in order to keep resale values and cachet high, and can moderate their inventory. China’s hoteliers, on the other hand, could face a potential race to the bottom as competition forces rate cuts to fill empty rooms.

　　As is the case for other luxury goods, increasingly wealthy Chinese customers may also pick up some of the slack. “What we find is the types of customers are changing,” said Wendy Huang, vice president of sales and marketing at Starwood Greater China. Instead of big corporate entertainment events, individuals are coming in for intimate dinners and paying out of their own pockets, she said. Check sizes may be smaller, but some guests are returning more frequently, she said. The company recently held a St. Regis wedding fair in China to woo brides.

　　The coming glut of luxury hotel rooms hasn’t iced many projects, or stopped owners from promising to build more and build big. Starwood plans to open more than a dozen new luxury hotels in China are unchanged. Hilton Worldwide, which is owned by Blackstone Group but may soon seek a public offering, is planning four new Waldorf hotels in China. A massive “luxury-meets-adventure” hotel, set in a mining quarry, is going ahead.