China's restaurants are failing at a 15 percent rate every month, the worst performance since the outbreak of SARS in 2003, according to the China Cuisine Association.
Beijing's year-on-year catering revenue growth rate dropped to 9.4 percent in May, significantly lower than last year's 16.7 percent, according to CCA data.
In Shanghai, the industry's growth rate fell into the single digits for the first time in years.
The low profit margins are mainly due to rising costs, with restaurant rents, labor costs and food ingredients prices increasing at annual rates of between 8 and 10 percent.
China's fast-food chains in first-tier cities performed better and kept profit margins at 15 percent, but many have postponed expansion plans.
Western fast-food chains were also affected. Operating profits in China fell 4 percent compared to last year due to the high inflation, according to Yum.
The CCA asked the government to reduce credit card fees and taxes in the catering industry, and introduce policies to support the sector.
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