Why '4-Stars' is the new '5-Stars' for China hotels

A five-star rating may be the holy grail of the hospitality industry, but top-end Chinese hotels are actively working to rid themselves of this prestigious ranking.

This comes as the luxury hotel sector struggles with shrinking revenues following the government's decision last year to ban officials from spending money at five-star hotels as part of its broader austerity drive.

(Read more: China's luxury gift-giving slumps 25%)

In 2013, 56 five-star hotels sought to downgrade their ratings to four stars, state press agency Xinhua reported, citing Chen Miaolin, vice president of the China Tourism Association.

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Chen, who is also the chairman of the New Century Tourism Group, parent group to 64 hotels, said he had instructed his five four-star New Century Hotels to bench plans for an upgrade to five stars under pressure from declining turnover.

According to Chen, the hotel industry faced a 25 percent decline in revenue in 2013, with 20 of more hotels closing down each month. There are around 4,000 star-rated hotels in the mainland, of which 680 are five-star, he said.

(Read more: Don't bet on China's luxury spenders: Goldman)

With the lunar new year around the corner, the Communist Party of China (CPC) issued a notice discouraging excessive spending and gifts before and during the week-long holiday, Xinhua reported.

As a result, government and state-owned enterprises are no longer throwing their year-end parties in five-star hotel ballrooms, but opting for the office canteens instead.

(Read more: China's public servants face austere Lunar New Year)

"High-end restaurants and hotels are really suffering, as nearly 60 percent of our turnover used to come from governmental departments and state-owned enterprises," Yang Xiaowei, a sales manager at Lijingwan International Hotel in Beijing told Xinhua.

The average revenue that hotels generated from their catering businesses plunged 17.2 percent last year, according to the China Tourist Hotel Association.

—By CNBC's Ansuya Harjani. Follow her on Twitter @Ansuya_H