Chinese budget hotel chains are expected to see steady development in the next two years, while players in the sector have started to develop mid-tier businesses, industry observers said.

As the Chinese economy is showing signs of stabilization and recovery, budget hotel chains such as Home Inn should see their occupancy rates remain above 85 percent in the next two years, according to a report issued in August by Guotai Junan Securities Co.

Four of the largest five hotel companies in China are budget hotel chains, indicating that the sector has seen strong development and is widely recognized by Chinese customers, a report released by the China Hotel Association showed.

Home Inn Group, 7 Days Group Holdings Ltd, Huazhu Hotels Group Ltd and Jinjiang Inn are the four largest budget hotel chains in China. Home Inn is the largest company with a market share of 21.8 percent, while the market share of the other three players totals 55. 5 percent.

However, rising rents and labor costs are pressuring the sector, so in addition to franchises, many of the budget hotel chains are adding mid-tier operations.

The Plateno Hotels Group, which owns 7 Days Inn, said in July that it is developing four high-end and mid-tier hotel brands based on its previous platform.

And Shanghai Jin Jiang International Hotels Development Co Ltd, which gets most of its profits from the Jinjiang Inn chain, is making efforts to expand to mid-tier business hotels.

Jin Jiang International bought mid-tier business hotel chain China Smart Hotel for 710 million yuan ($115.12 million) in June, which directly owned 21 hotels in operation or under construction. Jin Jiang now manages about 40 mid-tier business hotels.

Another company in the sector, Huazhu Hotels Group Ltd also bought mid-tier hotel chain Xingcheng last year.

At the same time, an increasing number of private equity investors are eyeing the country's mid-tier hotel market. According to ChinaVenture Group, five hotel companies received equity investments totaling $288 million in 2012.

Most private equity firms focused on Chinese mid-tier hotels last year.

Global private equity firm Carlyle Group took a controlling 49 percent stake in China's Mandarin Hotel Holdings Ltd in July 2012, while Chinese private equity firm Shenzhen Capital Group Co Ltd invested in Shenzhen China Harbor View Hotel Co Ltd in February 2012.

The China Hotel Association report said that the country's mid-tier hotels are mainly independent and traditional companies with fragmented brands, so the market has great potential.