The high-end hotel market has become saturated in China, with industry-wide declines in average occupancy and daily rates this year.

In the first quarter, the average daily rate for five-star hotels slid 6.15 percent year-on-year, while the average occupancy rate was down by 7.8 percentage points, according to the National Tourism Administration.

"This year is very challenging for the industry," said Sun Jian, chief development officer for China of InterContinental Hotels Group Plc.

The group's average daily rate in China fell 1.2 percent in the first half, its interim results show.

"We worked very hard to hold the decline to only 1 percent, but it was still a surprise, as we never saw a decline in the China market before," he added.

There are simply too many high-end hotels in the nation, industry sources said.

In the first half, the supply of hotel rooms went up, as did demand. But demand only increased 1.4 percent while supply increased 4.3 percent, said He Wen, business development manager in China for STR Global, an international hotel industry data and analysis provider.

High-end and luxury hotels will account for the largest part of the future new supply in China, He said.

A slowing domestic economy is weighing on the sector.

"The hotel industry is directly affected by the macroeconomic situation," said Zhu Chaolun, vice-president of the China hotel and tourism real estate department of Jones Lang LaSalle Inc, a real estate services firm based in Chicago.

Zhu said that business travel declines as economic growth decelerates, which cuts demand for hotel rooms, especially at the higher end. 

Most luxury hotels in China cannot attain an occupancy rate of 70 percent, which is the break-even point for the hotel industry, he said.