SHANGRI-LA, China (Reuters) - Excusing himself from the banquet table, Liao Chunlei stood up, wine glass in hand, and belted out a traditional folk song with colleagues as his face turned red with drink.
"In these parts," said Liao, head of the tourism bureau in this ethnic Tibetan mountain town in southwestern China, "if you can talk you can sing and if you can walk you can dance."
The singing and countless toasts of two dozen tourism officials celebrating a deal to develop a remote mountain park seemed to belie the fact that 2008 was likely to be a write-off for tourism in Shangri-la and other Tibetan areas.
Tours were halted across the Himalayan region after anti-Beijing protests rippled across Tibetan-populated parts of China and devolved into rioting in Lhasa on March 14, just as the peak travel season should have been starting.
Even when tourism eventually picks up -- and almost everyone here believes that is inevitable -- the tensions that some say led to the unrest may continue to go un-addressed.
Since the rioting, most Tibetan areas have re-opened, although security remains tight and many travelers remain wary -- even of Shangri-la, where there were no protests or violence.
On a narrow cobblestone street in the old part of town, Nepalese chef Bhaskar Diyali stood outside with his hands in his pockets one evening during what should have been the dinner rush.
"I never had free time like this last year," he said. "Many shops, they close. Even many restaurants close."
Elsewhere in the old quarter, Liang Fuhua's friend tried to persuade him to close his camping shop early and go for a beer because so few people were about. Liang estimated that about half the number of last year's visitors had come so far this season.
"I'm not very optimistic about the prospects for us ahead of the Olympics," he said. The Beijing Games run from August 8-24. "And then, by October, it's getting cold."
This month there were three flights a day arriving at Shangri-la, situated in the Himalayan foothills at an altitude of 3,200 meters (10,500 ft) in the northwestern corner of Yunnan province. Last year there were many more, one official said.
The devastating May 12 earthquake centered in neighboring Sichuan province, killing nearly 70,000 people, also put off tourists.
But the pain will likely be short lived here in Shangri-la, which was built for tourism -- literally -- and the momentum behind its growth as a tourist destination is substantial.
The hill covered county was called Zhongdian until it was re-named in 2002 after the mountain valley community in James Hilton's 1933 novel, "Lost Horizon." The re-branding transformed the landscape.
In 1996, 15,000 people visited, said A Wa, head of tourism for the local prefecture. Last year, there were nearly 2.9 million visits, 30 percent more than in 2006. Almost two-thirds of the population depend on tourism for their livelihoods.
"Normally, it would take 20, 30 years to get off the ground," A Wa said. "But we just took 10 years."
Like other areas in western China, Shangri-la has benefited from central government policy to develop the west and narrow the gap between China's hinterland and its developing coastline.
But heavy investment in roads and hotels has not been matched by comparable attention to necessities like education and health, and experts say the rapid change has exacerbated some local disparities and is a cause of ethnic tension.
Ben Hillman, a lecturer at Australian National University who founded a non-profit job training institute in Shangri-la, said a key problem was that many locals were ill-equipped in terms of skills to participate in the new economy.
"There's plenty of young people that want jobs, but there's no sort of mechanisms for feeding those young people into the economy as it grows," he said.
In some areas around Shangri-la, tourism projects have created direct tensions. At Shika Mountain, about 10 km (6 miles) away, developers installed a cable car that local horsemen claim destroyed their business of taking visitors to the top.
On one side of nearby Napa Lake, another developer locked up the rights to horse trips. A development consultant who declined to be named said nearby villages got a cut, but communities on the far side of the lake were angry about getting nothing.
"Most ethnic conflict is economic conflict," Hillman said, adding that the Lhasa riots were a symptom of the same problem. China says 18 "innocent civilians" died in the rioting.
But back at the banquet, officials were quick to explain why they think Shangri-la is fundamentally different from the areas where unrest erupted. It is closer to Han-Chinese populated areas and is home to a handful of other ethnic minorities, making for a more tolerant population.
A Wa, the prefectural tourism official, said tourism had enhanced social stability by raising the economic tide.
Still, he and others were clearly relieved that a day earlier the Olympic torch was paraded through town without incident.
"Now that the torch has come through people can relax," Liao said.
(Editing by Megan Goldin)