Chinese Buffet Goes to Jail without Passing Go

The situation for casinos in Macau has not improved; gaming revenue in November fell 32.3 percent to $2.1 billion. Studio City opened without growing the market and the government is adamant about holding the line on new table allocations. The main culprit in Macau’s disastrous decline is the Chinese government. Eighteen months ago, China began to crack down on corruption within the Communist Party and the government. Morgan Stanley thinks the Chinese real estate bubble was also a factor. In a report it estimated that between 2009 and 2013 Macau was flooded with cash rich Chinese investors; each was spending between $100,000 and $250,000 a year. Morgan Stanley says that was simply unsustainable. Indeed the real estate bubble burst and the investors disappeared.

Chinese VIP and premium mass gamblers were losing between US$100,000 and US$250,000 per head each year at the peak of the casino gambling boom that was seen most prominently in Macau, estimates a new report from Morgan Stanley group…between 2009 and 2013…“The availability of junket liquidity and the [China] real estate bubble [liquidity], used as collateral, drove the segment higher. Gross Gaming Revenue Asia, 12-15-15

That coincided with the beginning of the Chinese government campaign to root out the “bad seeds” in the party and government. The government’s efforts have apparently paid off. Now the government is beginning the next phase of its crackdown, this time on the private sector. On December 10th, a Chinese investor, sometimes called the Chinese Warren Buffet, disappeared in Shanghai. He was last seen in the custody of police at the airport. His company, Fosun released a statement the following day saying he was in custody and assisting in an investigation. This is not the first time a business person had disappeared, but Guo Guangchang, ‘China’s Waren Buffet’, is the highest profile business person to be whisked into places unknown.

‘China’s Warren Buffett’ goes missing: Guo Guangchang – dubbed ‘China’s Warren Buffett’ – was last seen with police at an airport in Shanghai. Simon Tomlinson, London Daily Mail, 12-11-15

The Chinese government can and does hold people without reporting the nature of any charges, the location of the detention or the intent of the questioning. It is frustrating for westerners and for the press, but it is the nature of the beast. It is unnerving for outsiders, but for high-profile Chinese it must be downright terrifying. This particular arrest probably signals more arrests of top business officials.

The Chinese word for “unreachable” — “shilian,” which means “lost contact” — has become a euphemism in China for the party holding executives and officials for questioning or arrest, often indefinitely and at an undisclosed location. Associated Press, 12-11-15

“A lot of companies will be on the investigation list and it will alert all the investors,” said Ronald Wan. Associated Press, 12-12-15

To those who feel the breath of the party on their necks, going to Macau to gamble must be the last thing on their mind. This arrest is another major blow to VIP gambling. Add that to an the increased government pressure on Union Pay. A recent announcement said the government will begin real-time monitoring of all mainland bank card activity. That is significant, according to Deutsche Bank those bankcards account for 10 to 15 percent of the cash used by gamblers in Macau. Of course on top of those factors there is the increased competition in Macau from Studio City and the casinos in Korea, Vietnam, the Philippines and Cambodia, all targeting Chinese gamblers. All in all you have a very bad ending to an already terrible year.

China is planning a further crackdown on abuses of the UnionPay card system…the memo sets out a detailed nationwide audit and warns that sanctions will be imposed. Asia Gaming Brief, 12-11-15

The Monetary Authority of Macau announced it would implement a new real-time monitoring system for mainland bank cards. Macau Daily Times, 12-14-15

In four years, the casinos licenses are coming up for review and renewal. The gaming companies will be judged on their investment in amenities that expand the appeal of Macau; ten or fifteen billion dollars has already been invested to that end. That may be enough to satisfy the regulators and keep the casino licenses, but it is not enough to reverse the downturn. By itself, diversification will not replace cash flow from the vanished high-rollers. Currently, only ten percent of Macau casino/resort revenue is coming from those non-gambling amenities; replacing the VIP gamblers with mass market players is also a flawed strategy. According to a recent study, 38 percent of Macau’s visitors only spend $125 – that is a far cry from the $125,000 the VIP gamblers were spending in 2013. The mass market has been growing as a percentage of total gaming revenue. It has grown from 20 percent of gaming revenue three years ago to 35 percent of revenue in November. That is good news of a sort, but total revenue is down approximately two billion dollars; the mass market will have to grow tenfold to make up for the loss of the VIP action.

The government in Macau recognizes there is a problem and has committed to help. It is bringing in marathons, art exhibits, car races and kite festivals; they are all good ideas, but are not likely to bring in the $2 billion in monthly gaming revenue that has been lost in the last two years. The new director of the Gaming Inspection and Coordination Bureau is promising a review of the regulations with the intent of improving them. He is not offering more table games or a roll back of smoking restrictions. Even if he did, those things would not heal the wound. Macau has been severely injured by the policies of mainland China and nothing short of a reversal of those policies would bring back the lost revenue. That is not likely to happen; in the meantime the casinos of Macau are sitting in the cell with Buffet. For this game, there is no “Get out of Jail Free” card.


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