What is Happening in Macau and Who Cares?

Gambling in Macau is the least popular topic that I ever discuss in a column. I have often wondered why no one wants to read about Macau as it has been one of the most dynamic stories in gaming for the last eight years. While we have been mired in a recession and too competition, gaming revenues in Macau have increased by seven-fold going from $6 billion in 2006 to $45 billion in 2013. For anyone unfamiliar with China’s oversight of Macau, it is confusing, but nevertheless dynamic. Macau is different from all other gaming jurisdictions. The customers, the rules and the phenomenal growth in revenues and profits are unique in the world. But, as confusing as its boom has been, the current bust is more so.

Macau’s casino market smashed records and exceeded even the most optimistic expectations for 2013, collecting more than $45.2 billion in gaming revenues during the year. The figure exceeded 2012’s record total of $38 billion by 18.6 percent…As a comparison, the Strip produced $6.2 billion in gaming revenues in 2012. Howard Stutz, Las Vegas Review-Journal, 1-2-14

Gaming revenues here have dropped for six straight months as at November (a 19.6 per cent decrease year-on-year) and investors are expecting the slowdown to last until June 2015. The biggest crisis since gaming liberalization will weigh heavily on casinos, the government, and the economy here. Luis Gonçalves, Macau Business Daily, 12-3-14

Macau came under Chinese control in 1999. It has a very unique legal status and is called a Special Administrative Region of the People’s Republic of China. It is part of China, but has some separate laws. The Chinese call it “One Country, Two Systems.” China allows Macau to operate with a capital-based economic system unlike China’s socialist-based system. Macau makes its own laws, but the Chinese government must approve and China reserves the right to change its mind about anything, at any time.

China’s ability to change policy in Macau unilaterally makes it very difficult to predict the future of anything in Macau. China could decide at any time to allow casinos on the mainland or close the casinos in Macau. Those are the two worst case scenarios, but nothing has happened lately to suggest China is considering either action at the moment. However, there have been some major changes in Chinese policy that are having a very significant impact on Macau. China is becoming increasingly intolerant of public smoking; as much as the Chinese like to gamble, they like to smoke more. China, like most countries, is trying to reduce the negative effects of nicotine on its population. This has forced a change in public smoking policy in Macau; the restrictions are hurting gaming revenue.

The Chinese Communist Party and the Chinese government are also on a campaign to eliminate graft and corruption. In the government’s view, too many public people are profiting from their official positions, either through bribery or embezzlement. The campaign has exposed some very high public figures and the subsequent prosecution received a great deal of media attention. The media coverage has frightened some officials into avoiding Macau. While not directly aimed at the casinos in Macau, the crackdown is hitting them directly in the pocketbook. Many of those corrupt public figures had been taking their ill-begotten wealth to Macau. The government’s policy is intended to stop both the gaining and the spending of those riches. As part of its efforts, the government is also tightening monetary and credit policies. The government recently announced a policy that will force Macau and the casinos to vet the junket representatives and gamblers. It is a clear message; “You can no longer let those thieves gamble!”

A former senior Chinese military officer would bribe officials by filling up a Mercedes with gold bars and simply handing over the keys, it is claimed. Gu Junshan, 57, former Lieutenant General in the logistics department of the People’s Liberation Army, is alleged to have been part of a scam worth a staggering £3.1billion. Reuters/ Damien Gayle, London Daily Mail, 12-9-14

The South China Morning Posts has reported that Chinese officials are deeply concerned with crime syndicates laundering overseas money through Macau gambling services. The central government is taking stronger measures to stem the flow of illicitly acquired money through Macau casinos. The South China Morning Post quotes unidentified sources as saying the Ministry of Public Security’s Economic Crimes Investigation Bureau will monitor electronically all money transfers made through the China Union Pay payment system. Macau Business, 12-17-14

The loss of a few high-rollers would not be a death knoll for most casinos, but in Macau those high-rollers are really important. Until 2013, nearly 75 percent of gaming revenue came from high-rollers and the VIP play is still 60 percent of total gaming revenue. The high-rollers are brought to Macau and managed by junket representatives who take a piece of the action. Indeed in some casinos, the junket representatives have separate gaming rooms within the casinos which they manage. They pay the casino a percentage of their profits. The VIP gamblers are mostly mainland Chinese and they make very, very big bets. The amount of money being bet does not make sense. Where do Chinese bureaucrats, businessmen and average citizens get the billions of dollars they are betting and losing in Macau? Apparently, that question has plagued the mainland Chinese government also and thus the measures to cleanse the party and the government of those who take the Chinese people’s money and gamble it away.

In the wake of the crackdown, gaming revenue in Macau has dropped dramatically – over 30 percent in December alone. The downturn does appear to be short-termed as the Chinese government promises that it will stay the course. When you take away all the questionable high-rolling money and restrict smoking in Macau, you have taken away its core business. China does not care and has warned the government in Macau that it must diversify away from gaming. Such radical changes in policy are both intriguing and confusing for me. It is confusing because everything in China is obscured from western observers by a curtain of strange language, history and culture. It is intriguing because there are nearly two billion people standing at the doorstep eager to gamble. But, those two billion people are held in check by a government acting upon a different set of rules and underlying philosophy than other governments.

In a sense, this crackdown is like Chairman Mao’s Great Proletarian Cultural Revolution. Under Mao, between 1966 and 1976, China experienced a dramatic political cleansing. Mao thought the party and the government needed to be purged of the fat cats and the decadent party members who had lost their way and forgotten the proletariat they were sworn to serve. Mao also believed the revolution that had driven and motivated China was losing its steam and a new generation needed its own revolution to motivate it. The Cultural Revolution was Mao’s attempt to re-instill the passion of revolution and idealism in the Chinese. The present general secretary of the Communist Party and president of China, Xi Jinping is, in his own way, also trying to bring back the idealism of the Revolution and Communism.

Xi Jinping, China’s president has called for the Communist Party’s leadership over the country’s universities to be enhanced in a continuing tightening of ideological controls across a wide range of society. Xi Jinping said higher learning institutions should publicize Marxism, one of the theoretical foundations of the Party, and enhance ideological guidance, the official Xinhua News Agency reported this week. Macau Daily Times, 12-31-14

Xi visited Macau in December. He smiled, shook many hands and acted very politely. For the casino industry, his words were not as warm and friendly as his smile and handshake. Xi promised to rid China of corruption and hold the reins of credit very tightly in his hands. His goal is to catch the “tigers and the flies.” He advised Macau to make serious plans to be something in addition to a gambling hub. And then he said, much as Mao might have said, “We need a sense of crisis, to solve some deep-seated issues.” He wants to move China forward economically, but he also wants to protect its core principles. Those principles do not include giving much consideration to capitalism, particularly not to gambling.

Traditionally, the Chinese take a very long view of life. They have, after all, a 5,000-year history. When the communist party took power in 1949, it put the European colonies on notice: The land and people were Chinese and in time China would assume control. China had several opportunities in the ensuing fifty years to take control of Macau, but it waited until the time was ripe and China was ready. It has only been 15 years since China took over Macau and for the moment, the casinos in Macau are useful for China. But it seems clear to me that China under the leadership Xi Jinping has decided to marginalize those casinos and replace them with something else. When and how this will happen is, of course, the question. In the meantime, the casinos in Macau will continue to operate. The boom, however, is over. As long as they exist, the casinos will be intriguing and confusing. Where does all of that money come from? How long will it continue to flow into Macau? And most interesting of all, what is China thinking? It is intriguing if you care, but not many people do. Eeyore said it well in Winnie the Pooh, “If anybody cares and nobody does.”


2 Responses to “What is Happening in Macau and Who Cares?”

  1. 1 rexdstock1 January 4, 2015 at 10:31 am

    Out of sight, out of mind, perhaps, here in the Americas, except for Wynn and Adelson (and their employees/associates).

    I know my friends in Australia care about these issues, as should any global vendor, which due to the surge of Mergers and Acquisitions, covers a wide swath.

    All these gambling issues have been “of the government(s)” as opposed to the desires of the populace, which creates this interesting (and age old) dichotomy of the attraction to money and our need to be protected from that attraction.

    Another great read, Ken. Thank you.

  2. 2 Duncan Winn January 5, 2015 at 9:23 am

    Chinese officials are worried about graft and corruption because it cuts into the amount of money THEY can steal…

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