(FORTUNE Magazine) – Here's a hotel manager's nightmare: You're standing by the front desk when a huge marble slab comes loose from the atrium wall and crashes to the ground. Your staff freeze for an instant, then return to their business as if nothing has happened. When a worried guest suggests they might want to check the rest of the wall for loose tiles, he's firmly told there's "no problem." The scene, however, isn't a bad dream. It happened last year at a hotel in China managed by a FORTUNE 500 global chain.

Hell is a Chinese hotel. The toilets leak, the staff are brain dead, and room service has a built-in time-delay switch. At least that's the caricature passed around by long-suffering diplomats, tourists, and corporate China hands. So who would want to get into this game? The answer: just about everyone. Most major hotel players are currently engaged in what seems at first glance like a reckless scramble for mainland venues. Until the mid-1990s few big-name hotels were found outside Beijing, Shanghai, and Guangzhou. Today around 80 hotels are being managed or launched across China by a roster of leading operators: Marriott, Hilton, Hyatt, Starwood (owner of Westin and Sheraton), Shangri-La, and Bass (British owners of Holiday Inn). Foreigners are the initial target clientele, but Chinese travelers are the ultimate prize.

In Mao's time the masses stayed at home, except when dispatched to the countryside to help build communism. Not anymore. Last year, according to government statistics, a staggering 659 million domestic tourist and business trips were made in China. It all adds up to an industry that China claims was worth $28 billion in 1998. If the global hotel chains can unlock this market, the rewards for them could be just as mind-boggling.

When international hoteliers talk about the China market, they roll out the same cliches as most foreign investors. The potential is huge. We can't afford not to be here. We're here for the long term. But there's a crucial difference. Most big hotel chains can plausibly claim to turn a profit in China while they wait for the market to grow. That's because groups like Hilton and Marriott don't risk capital in real estate but earn their income from hotel-management contracts, which reduce overhead and liabilities to a minimum. What the hotel industry illustrates is the value of not getting sucked in. Call it constructive but limited engagement.

That's not, of course, how it appears on the surface. In Beijing, Shanghai, and Guangzhou, and increasingly in secondary cities such as Chengdu and Wuhan, the hotel heavyweights have embarked on what looks like an insane dash for mainland growth at the worst moment in the economic cycle. Take Starwood, which now operates ten mainland hotels. Within a year, three more will be added to the list, and by 2005, if Starwood's Asia-Pacific president, Ted Teng, keeps his China strategy on track, the portfolio will have swollen to 30 establishments. Says Teng, a former refugee who checked out of China in 1959: "My dream is that there will be more Starwood hotels in China than anywhere else outside the U.S."

Starwood's chief mainland competitors are singing the same groundbreaking tune. "All our current expansion is in China," reports Joanne Watkins, spokeswoman for Shangri-La, the Asian luxury chain controlled by Malaysian billionaire Robert Kuok. In June 1989, Kuok's commitment to the mainland was sorely tested during the Beijing crackdown, as tanks passed by the nearly completed China World Center--a glitzy hotel and commercial project developed by Shangri-La and China's Trade Ministry. A decade after that unnerving welcome, the complex includes a second, less expensive hotel at the rear (managed under Shangri-La's Traders brand), and another luxury venue is set to open across the road. By year-end two more hotels will be launched in Harbin and Wuhan, boosting Shangri-La's mainland portfolio to 12.

But if any hotel epitomizes the current mood of the big chains, it's the Grand Hyatt in Shanghai. Opened in March, the hotel occupies the top 34 stories of the brand-new Jinmao Tower--an astonishing 414-meter skyscraper designed with Shanghai's art deco heritage in mind at a total cost of $540 million. Hyatt can now claim to operate the world's tallest hotel. The group plans to expand its mainland network from three venues to ten.

So how's the view? Not good. Business and tourist traffic to Shanghai has been badly hit by the regional crisis, with total visitor arrivals down 7.6% in 1998. Hotel occupancy rates fell from 69% to 61%. Predicts Nigel Summers, a travel industry consultant at Horwath Asia Pacific in Hong Kong: "For hotels, the next three years are going to be tough." The picture looks even worse in the secondary cities, where the big hotel chains have started to plant their flags.

Hence the need to secure risk-insulated management contracts. Consider a standard, renewable ten-year contract to run a top-tier hotel in Beijing's international district, where you'll find Hilton, Marriott, Starwood, and a clutch of other leading names. According to Summers, the management company typically claims 2% to 3% of total revenues, plus up to 10% of the operating profit. That can yield annual profits of between $500,000 and $1 million per property.

Since this is China, there has to be a downside. It begins for any overseas player that sinks capital into the mainland's overstocked hotel property market--a legacy of the mid-1990s construction boom. Shangri-La, which builds its own hotels, has put several China projects on hold because of the economic slowdown. In March, Hong Kong & Shanghai Hotels announced a $42 million provision against losses at the top-tier--and underperforming--Palace Hotel in Beijing, in which it has a 20% joint venture stake.

At times even management groups that don't normally risk their own equity are persuaded to take minority holdings by owners that need cash to finish the projects. Starwood, for instance, took the unusual step of taking a 31% stake in Beijing's New International Club Hotel, for which it paid $54 million to the developer, Beijing's Diplomatic Services Bureau (DSB). Part of China's Ministry of State Security, the DSB isn't the most obvious candidate for the luxury-hotel game: It is the monopoly provider of cooks, cleaners, and drivers (and some would say spies) to the capital's foreign embassies. Starwood, plus the other leading foreign players, claims to be comfortable with such state-backed owners. But it can't be easy to work with entities with no track record in hotel development.

Is dealing with shadowy, frequently incompetent local owners worth the hassle? To understand why it might be, consider the series of bets the hotel chains have made on the market's future growth. First, they're assuming that inbound business and tourist traffic to China will pick up. Second, that sooner or later a critical mass of mainlanders will tire of Chinese hotels--think bath stains, cockroaches, and dingy karaoke bars--and opt for something a little more salubrious. In anticipation, big names such as Marriott and Holiday Inn are signing deals in smaller cities like Wuxi, Jiangsu province, and Hefei, Anhui province--the Chinese equivalents of Dayton or Fresno--with a view to building a local customer base.

But given China's modest per capita income--at most $800 a year--finding customers won't be easy. So the hotels have their sights set on mainland business travelers--a huge emerging customer class of joint venture executives, state enterprise managers, and party officials whose defining feature is an expense account.

Already these people are generating enough demand to whet the appetite of hotel strategists like Daniel Lai, sales and marketing director for Marriott in China. Room charges at provincial Chinese hotels can sink as low as $10 (with service to match); not even a budget chain can work at those rates. What can be built are $50-per-night (or a little more) venues, in the hope that China's corporate man can be persuaded to kiss the cockroaches goodbye and move up-market. Marriott, says Lai, aims to be operating seven Courtyard hotels in this price range by the end of the year. Hilton, too, is pondering whether to launch the group's economy Garden Inn brand. Says Koos Klein, Hilton's Asia-Pacific president: "The gut feeling is that a serious market will develop over the next decade."

It won't be an easy market to enter, though. Downtown land prices in Chinese cities remain way too high for economy hotels, while cheaper suburban sites are too inaccessible to make commercial sense. Add the crippling cost of expatriate managers--essential for such a specialized business--and it's hardly surprising that Hilton's Klein is treading cautiously in this niche of the market. His downbeat view: "There've been many gung-ho statements by other companies about the economy market, but most of them haven't operated in China yet."

That leaves the top end of the market--a five-star world of sleek doormen, plush carpets, and $200-plus room rates. No mainlander can afford those prices, right? Well, not exactly. All big chains offer heavy, undisclosed discounts to local guests. A mainlander can usually expect to knock at least 50% off the room rate, and sometimes much more. Nobody's pretending that such a custom generates riches, but with occupancy levels in a trough, it's better than leaving the rooms empty. And although we're talking about only a tiny customer sliver--supremely well-connected types like senior party officials and big-shot businessmen--the cut rates help to build brand awareness for the day when locals can afford full fare.

Meanwhile, there are the foreign guests, who pay international rates and often receive lousy service in return. The leading chains would like you to believe that in China they deliver the same quality of service as they would in, say, Hong Kong or Switzerland. It isn't true, principally because Chinese staff are still prone to some distinctly communist work habits--chief among them a tendency to do nothing unless issued extremely specific orders. Starwood's Teng has introduced "attitude training" for the staff at the group's Beijing flagship, aimed at teaching them how to anticipate customer needs. He ruefully notes, "That's not easy to do in a structured society like China, where most people aren't keen to take on responsibilities." To be fair, Starwood's personnel blitz seems to be taking effect at the New International Club, whose reprogrammed staff are noticeably eager to please. Elsewhere it's a different story, with many five-star hotels in China still woefully short of international standards.

Which raises the question: Is the global hotel industry's current breakneck expansion in China really worth the effort? Maybe it is--but only if such teething troubles as overcooked food, undercleaned rooms, and yes, the occasional flying tile are fixed before too many more stories are added to China's hotel horror anthology.