According to Fitch Ratings, secondary and tertiary Chinese markets pose the greatest risk of oversupply and project under performance for U.S. lodging companies.

Secondary and tertiary Chinese markets pose the greatest risk of oversupply and project under performance for U.S. lodging companies, according to Fitch Ratings. Ratings have withstood decelerating economic growth in China, but risk is still evident.

Banks have responded to regulatory restrictions on lending to developers, local governments and overcapacity sectors by making off-balance loans for developments in second- and third-tier markets, usually at a relatively high cost and to a select number of top nation/province-wide developers. We believe growth in the shadow lending market has challenged external credit assessments by weakening transparency and could contribute to financial destabilization.

There is limited downside risk to U.S. lodging issuer ratings from decelerating economic growth in China. Our base case expectation assumes mid-single-digit GDP (and RevPAR) growth through 2016. Earnings contributions from the region for most lodging C-corps remain modest (estimated range of 5%-15%). Company development pipelines are largely under construction with committed third-party financing. Global lodging fundamentals will generally be robust (5%-7% RevPAR) in 2015. Lastly, companies are maintaining credit metrics within Fitch's sensitivities for their respective ratings.

Company risk varies based on relative exposure to China generally and nonprime markets specifically. International contracts often have a greater amount of incentive income, making the fees more volatile. Some companies also own hotel assets located in China. Fitch believes Starwood ('BBB'/Stable), Wyndham ('BBB-'/Stable) and InterContinental (NR) have the greatest exposure to secondary and tertiary Chinese markets. The latter owns the 503-room InterContinental Hong Kong. Marriott ('BBB'/Stable) and Hilton (NR) were later to expand in China and have less exposure as a result.

A sharper correction in property that led to layoffs among developers and builders would risk undermining consumption and triggering a broader, more abrupt slowdown of the economy. Residential prices fell 0.5% year over year during the first 10 months of 2014. This represents the first decline over this period since 2008 and, before that, 1999. However, Fitch estimates the monthly year-on-year rate turned positive in September, suggesting risk may be diminishing. This dovetails with recent improvements in select economic indicators, including the government PMI, fixed asset investment and export growth.

Tighter monetary conditions since mid-2013 have contributed to triggering a correction in the residential real estate market. The agency believes a short-term supply overhang remains to be worked through, posing ongoing downside risk to China's outlook. The share of the urban labor force engaged in construction and real estate averaged 9% from 2001-2008, but has since risen to 17%