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Chinese firms march to Beijing's austerity beat

Publication Date : 03-02-2014

 

When two Chinese hotel owners met Harry Tan late last year to discuss the management of their property, they had a highly unusual request.

Despite their hotels' high-end furnishings and amenities making them eligible for a five-star rating - typically a highly-sought after benchmark of quality - both men, whose hotels are in second- and third-tier cities, wanted to apply instead for a lower rating or forgo one altogether.

"This is a 180-degree turn from the past where hoteliers were very eager to get the stars. Now, they are procrastinating and some do not even want the five-star status," Tan, a Beijing-based Singaporean who owns the Days Inn master franchise rights for Greater China, told The Straits Times.

A year after President Xi Jinping unleashed an austerity campaign that has officials scaling back profligate spending, many high-end restaurants and hotels are taking creative steps to get around the new policy as they fight to survive during the festive Chinese New Year period.

Some hotels, for instance, are seeking lower-star ratings so they do not lose government business while others are cutting prices.

Airlines are also offering cheaper business class seats while restaurants are pushing promotions for events like graduation parties or a baby's first month celebration to make up for the drop in demand for lavish banquets.

This comes amid a growing list of new rules requiring officials to downgrade their lifestyles by reducing public funds spent on cigarettes, banquets, cars and travel, and eliminating perks like private-jet travel.

"It is a double whammy for hotels as not only do officials avoid staying at and holding banquets at luxury hotels, companies that typically wine and dine these officials have also halted this practice," said Tan, whose firm has inked about 140 hotel management and franchise contracts across China.

As such, he has advised some hotel developers to consider scaling back the ostentation, such as taking shark's fin off their menu or reducing the number of private rooms.

Tourist resort city Sanya in southern Hainan province is another victim of Xi's push for frugality, industry players say.

Government officials and employees from state-owned enterprises, whose vacations to Sanya over the week-long Chinese New Year holiday are sometimes part of official trips or paid for by private businessmen, are now staying home, said a general manager of a hotel in Sanya, who declined to be named due to sensitivities.

He told The Straits Times that suite rates at the posh Yalong Bay, which typically spike to up to three times their usual during the holiday period, have seen lower prices this year as hotels struggle to attract vacationers amid higher vacancy rates.

"In previous years, rates for a suite would go for 8,000 (US$1,308) to 10,000 yuan a night but they are only 5,000 to 6,000 yuan this year," he said, adding that business in the area has tumbled by up to 30 per cent.

But it is not just the hospitality sector that is feeling the pinch. More than a dozen sectors, from entertainment to funerals, are being tracked even as the campaign shows no signs of letting up.

Earlier this month, the finance ministry banned officials under the minister level from flying business class, while the State Council said last October that officials should not travel abroad unless absolutely necessary and should avoid popular tourist spots.

Even the printing industry has taken a hit with recent rules forbidding thousands of government-owned banks and other firms from sending customers free calendars.

Marketing manager Jiang Haibo of Xuriyuan Printing Agency said the firm's calendar business - which accounts for two-thirds of the firm's average yearly turnover of 20 million yuan - plummeted 60 per cent last year compared to the year before.

This is likely the trough for the industry with this year's outlook similarly gloomy. Some printing firms will inevitably be forced out of business, he added.

"The scope of the industry is narrow and it's hard to develop new business lines. There are only so many things that need regular printing," Jiang said.

Taken together, the new austerity has crimped growth in the world's No. 2 economy.

China's growth in luxury spending dropped from 7 per cent in 2012 to just 2 per cent last year, its slowest pace since 2000, said a report by consultancy Bain & Company. Retail sales growth also slowed to 13.1 per cent last year from 14.3 per cent in 2012.

But even as the belt tightening takes its toll, some industries are adapting to the changes with new marketing strategies.

Airlines, high-end hotels and restaurants are all offering discounts to the masses, according to a Wall Street Journal report.

On the popular Beijing-Shanghai route, for instance, it is possible to get a business class seat for just US$200 now, 60 per cent less than previously.

While some changes might be temporary stop-gap measures to keep businesses afloat, others could be permanent.

"The hotel industry has accepted that these policy changes will stay for good. Many have not only changed the way they operate, but have done so permanently," Tan said.

*US$1 = 6.06 yuan

 

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