Palau's Tourism Bureau says local businesses are suffering greatly in the wake of China's ban on tourist operators, as the country struggles to realign its economy.
China still makes up most of Palau's tourists but the country has seen a significant drop in number since Beijing instructed agencies to stop flights to Palau because of its diplomatic relations with Taiwan.
Kevin Mesebeluu, the director of Palau's Tourism Bureau, said many hotels were operating below 50% occupancy and several industries catering to tourists were having to shift to local markets.
"So, yes, we are concerned, because some locals who were reliant on that type of market with the tour packages, they're suffering greatly," he said.
"But it's also a chance for us to take a look at the industry and ensure that that type of busines model, that type of market.
"We have other alternatives that can soften the blow if these things continue to happen," Mr Mesebeluu said.
Chinese tourists have made up 13 percent of Palau's tourists so far this year, compared with 48 percent in the 2017 financial year.
In July, Palau Pacific Airways suspended its China flights because of financial losses following Beijing's ban on tourist operators visiting Palau.