Chinese government keeps pressure on?Macau

Xi Jinping, the President of China since 2013, continues to amplify his rule over the semi-autonomous region of Macau by urging officials to tighten gaming regulation. As a result, casino revenue in the southern Chinese enclave last year suffered its first annual decline since results were first published in 2002.

Official data showed that after twelve years of increasing revenues, casinos won 2.6pc less in 2014, with December marking a seventh consecutive monthly decrease. According to news agency Reuters, Macau operators lost a combined US$ 58bn in market value during the second half of 2014. These loses are fuelled by an anti-corruption drive in the sector as well as China’s economic slowdown. 

The world’s most profitable gaming destination is the only jurisdiction in China with legal casinos and has become the epicentre of the global gaming industry since the end of a 40-year monopoly opened the door to foreign operators. It is now a gambling mecca where, under the previous Chinese government, the six casino concessionaires had free reign to build unstoppable gaming empires. 

Casino gaming is now an integral part of Macau’s society, is the biggest contributor to GDP, employment, and injected over US$ 45.2bn last year alone into the city of just half a million people. According to recent estimates by Carlos Siu Lam, an associate professor at the Gaming Teaching and Research Center at Macao Polytechnic Institute, gaming accounts for just over 80pc of Macau’s economy.

Since the introduction of foreign casino operators in 2002, the sector has seen unprecedented growth and gaming revenue has increased approximately 1,500pc over the past decade. Much of this growth has been fuelled by junket operators who run high-stake games for China’s wealthy. Official figures have shown VIP Baccarat accounting for some 88pc of total Macau casino winnings.

China only allows 20,000 yuan (US$ 3,200) to be moved out of the country at any one time and US$ 50,000 a year. To circumvent this, junket operators arrange finance for games and ferry money across borders. Players can then use that money to play high-stake games in Macau and collect their winnings in US funds or Hong Kong dollars and invest it in property or offshore tax havens.

Diplomatic cables released by Wikileaks claim that Macau’s “phenomenal success is based on a formula that facilitates if not encourages money laundering.” Beijing wants to eradicate any potential illicit activity, as well as gain better control over currency in and out of China, and its anti-corruption campaign has encumbered the flow of money at VIP tables in Macau.

A number of high rollers have held back from being seen at the city’s casinos amidst the crackdown, which is noticed by a rise of players at VIP tables in alternative gambling destinations such as Manila and Las Vegas. In addition to increased efforts by the government to further regulate the sector and introduce cash declaration systems, several junket operators have also been arrested.

“The news flow on junket investors’ assets being frozen and increased scrutiny on mainlanders’ gambling overseas reinforces our concern that China’s anti-grafting drive may now ease any time soon,” wrote Goldman Sachs in a note to investors, but remaining optimistic, added, “Our base case still assumes a backend-loaded 20 percent year-on-year recovery in the second half of 2015 post the two new casino openings.”

Seven new integrated resorts are set to open on the Cotai Strip by 2017 and a new border policy implemented by the Macau government could see rise to more tourists in the region. Reinforced authority by Xi Jinping over the Macau government at the end of last year and its recently re-elected CEO continues to pressure the region to diversify away from casinos with non-gaming facilities.

During a December visit, Xi encouraged Macau leaders to promote “appropriate diversification” and expand beyond gambling. “This is of great importance for the interests of the people of Macau,” remarked the Chinese President.

In compliance with the government, casinos have already started to place focus on non-gaming amenities. More boxing and sports events are planned for the region, as well as additional hotel rooms to cater for an expected rise of a wider demographic of tourists and families. Macao Studio City, one of the news resorts set to open in the coming months, will house film and TV production studios. 

“There’s an opportunity for Macau to attract a new breed of customer, one which is looking for a more holistic experience,” added Aaron Fischer, a gambling analyst at brokerage firm CLSA. “We believe Macau is a tourism story, and without more hotel rooms, then Macau can’t grow the overnight visitor market.”