Talking Point

Under starter’s orders

Is China ready to lift its ban on betting on horse races?

Horseracing-w

Jockey Zac Purton celebrates victory at Hong Kong’s Shatin racecourse, one of the two tracks in the city

The oldest surviving state-owned enterprise in China, according to a documentary from state broadcaster CCTV, is the Shandan Horse Ranch in Gansu province. The breeding facility was created more than 2,000 years ago by Emperor Wu of the Han Dynasty, arguably the country’s greatest ruler. (The Han Chinese are named after his dynasty, which doubled the size of the Middle Kingdom.)

Wu owes much of his legacy to horses bred and trained at the Shandan Horse Ranch. In the Han era cavalry were the equivalent of tank regiments and all the successful conquests of the country began from the north, where warhorses were in more abundant supply (one exception was Chiang Kai-shek, who fought his way from Guangzhou in the south to Beijing – but in his case his forces were mechanised). To defend the Han empire against the invading nomads, Emperor Wu instructed his generals to import thoroughbreds from central Asia and raise them at the Shandan Horse Ranch. He had heard that the best steeds came from a region in today’s Turkmenistan near the Ferghana Valley. Legend had it that the animals even sweated blood when they were worked hard. So when a request to buy these “heavenly horses” was rejected, Emperor Wu sent in more than 25,000 soldiers. The army returned with the prized animals but less than half of its troops. (On a sidenote: BMW’s cleverly chosen name in Chinese is linked to these revered horses.)

Today the Shandan Horse Ranch is part of the China Animal Husbandry Group. The latter has raised more than 10,000 horses itself but its executives will be noting that the import of thoroughbreds is on the rise again. This time the catalyst is not military – partly it is down to the increased popularity of riding. But there is another murmur as to why private clubs are buying steeds from overseas: could the country be moving closer to legalising gambling on horse racing?

More horse owners in China

A Boeing 747 cargo plane flown from Ireland’s Shannon Airport to Beijing in early January carried some unusual passengers: a team of professional grooms, a vet, 30 handlers and 76 thoroughbred horses.

The €3 million ($3.2 million) airlift was funded by Zhang Yuesheng, owner of Yulong Horse Industry in Shanxi. He had bought the horses from the bloodstock agency BBA Ireland. It was the largest export of Irish bloodstock into China and the transaction was hailed as “a major leap into the lucrative Chinese market” by the Irish Times.

Just a few days after flying in the Irish studs, Yulong’s Zhang told the Financial Times that he had invested another $15 million in Australian bloodstock, including a stud farm in Victoria.

Demand for thoroughbreds in China has gone from almost a rounding error to becoming Australia’s fourth biggest market (after New Zealand, Singapore and Hong Kong). The Financial Times reports that nearly a dozen billionaires from China took part in the annual Magic Million auction in Queensland a fortnight ago. They helped push sales of yearlings to another record. The biggest buyer was the China Horse Club, which paid $5 million for 21 horses.

According to the state-run China Equestrian Sports Association, the Chinese have imported more than 2,000 racehorses each year since 2008. The number for 2015 was 2,300 with a total investment of more than Rmb500 million ($72.5 million). Qiao Pao, a newspaper that targets overseas Chinese readers, has spotted the same trend. “Just like any other commodity, the world’s horse breeding industry is targeting the Chinese and helping them to grow its market,” it said.

Who are the horse fans?

A Chinese language magazine called Equestrian – which is based in Beijing – celebrated its 10th anniversary earlier this month by publishing a detailed overview of China’s ‘horse industry’.

The magazine noted that when it was first launched the few riding clubs in China that existed were popular mostly with foreigners, haigui (“sea turtles” – Chinese returning from overseas) and a few high net worth individuals. But now the sport has become a more popular pastime among China’s new rich and middle class. “In the past two years more parents are taking their kids to horse riding classes. This leisure consumption has so far been the main driving force in the Chinese market,” it pointed out.

By the end of last year, there were 907 equestrian clubs in China, each one owning 51 horses on average, the magazine thought. More than 200 of these private (and well connected) clubs are based in Beijing. Polo has become fashionable too (see WiC96). The first polo club opened in Hangzhou in 2007, and New Express Daily reports that its members were successful entrepreneurs: membership cost Rmb500,000, and players needed about Rmb300,000 for a polo pony, plus Rmb1 million a year in running costs. Hong Kong-listed developer Goldin Property then opened another polo club in Tianjin, and Goldin’s owner has even sponsored charity matches in Gloucestershire where British princes William and Harry have competed.

How about horse racing clubs?

Horse racing is a legitimate activity in China, although it is still forbidden to gamble on the races themselves (more on this later).

More race courses and jockey clubs have been emerging. The China Horse Club, for instance, is in its fourth year with about 300 members. Its founder Teo Ah Khing, a Malaysian Chinese, told the Financial Times that his club is “one of the top 10 clubs in the world”, although he admits most of its horses race outside the country (a ban on Chinese horses competing overseas was lifted in 2011).

On the domestic front, horse racing has pretensions as a spectator sport. The Wuhan Jockey Club (WJC), for example, was established in 2005. The club has stands from which 30,000 can watch races. Since 2014 it has teamed up with Wuhan’s local government and the General Administration of Sport, the government’s top sports regulator, to promote the sport. It offers lucrative prize money for some of its signature races, and the public can take part in predicting the outcome. However, the activity is marketed as an “intelligence guessing game”. And the prize for making the right call is, typically, a lottery-type arrangement to win an iPhone instead of cold, hard cash.

According to Sina Horseracing (a website for the sport), a firm called Rider Horse is another of the “star enterprises” in China’s horse racing firmament. The Inner Mongolia-based firm was founded in 2006 by a Manchu entrepreneur and it runs one of the largest breeding centres with a view to developing the best Mongolian racehorses (bred from the same bloodline that helped Genghis Khan conquer much of Eurasia). Rider Horse also matches up investors and domestic jockey clubs to organise their own races.

Why are investors interested?

Private equity groups have been active in investing in promising studs. A unit of the state conglomerate Citic Group has also teamed up with Rider Horse to develop an equestrian and horseracing club in Yunnan, and other local governments are keen to get involved in the horse industry as well. The Xinjiang government, for instance, published a policy document last month to boost its own chances of securing more business. By 2020, Xinjiang plans to have more than a million horses at its ranches, fostering an industry value chain that could be worth more than Rmb20 billion.

However, the key to unlocking the full potential of the industry, as Southern Weekend made plain, is horse racing and, even more crucially, legalised bookmaking.

The magazine said that when the Wuhan government was planning the city’s first racecourse about 10 years ago, it was expecting more than Rmb40 billion of tax income from its horse racing lottery. But the scheme never secured the central government’s green light. With gambling out of the equation, public enthusiasm has been lacking. Southern Weekend reported in 2014 that the Wuhan Jockey Club relied on real estate income to keep its operations going. And the reason the club’s investors are hanging on? Hope that the restrictions on punting will be removed…

What are the odds of that?

The discussion dates back to 1982, when a group of agricultural experts wrote to Deng Xiaoping about lifting the ban. Since then Southern Weekend says a delegation routinely makes the very same proposal during the Chinese legislature’s annual gathering in Beijing. City governments have tried to test the official line on betting too. The Guangzhou government, for instance, put forward its own scheme in the early 1990s. According to Southern Weekend, the government-backed race course was home to more than a thousand horses at its peak in 1996. There were about 100 lottery stations in Guangdong and the wagers could reach Rmb10 million a race.

A key official with the jockey club at the time even penned an article titled “A discussion on China’s horse racing” and got it printed in the People’s Daily.

Guangzhou’s foray into the sector proved futile. The races were riddled with corruption (a doped horse was even said to have fallen asleep during one race) and five government agencies issued a joint directive in 2002 reaffirming that betting on horse races was outlawed. Four years later the Guangzhou racecourse was converted into a huge carpark.

In 2014 the equestrian industry pricked up its ears once again when news broke that the China Jockey Club had just been launched in Beijing. There were even reports that the Queen’s grandson – Peter Phillips – had been hired to advise on how to develop a sustainable racing industry. However, the attempt was deemed an elaborate hoax when the State Council swiftly issued a stern statement that the China Jockey Club was not an official state-backed body (see WiC255).

Is Beijing likely to soften its stance?

China Horse Club’s Teo told the Financial Times that he thinks that attitudes are changing. “The legislation of gambling is a question of when and not if,” he said, although he believes it will happen in “five to 10 years”.

Some observers think the change could come sooner. In a recent research report on gaming, Industrial Securities noted that when the General Administration of Sport published its five-year plan on the lottery industry last year, the document included “promoting the development of the horse lottery” as a policy priority for the first time.

“There is light at the end of the tunnel,” the research report suggested, adding that lifting the ban on gaming could generate up to Rmb600 billion in lottery sales a year. Another carrot that the central government might find tempting, it says, is the prospect of 6 million new jobs related to the Sport of Kings. Wang Wei, a racing pundit and the author of Horseracing Bible, has suggested that betting could be rolled out gradually across the country. The first step, he believes, might be to allow the public to bet on televised horse racing beamed in from overseas.

Or what about Chinese tourists betting on mainland races – held in places like Wuhan – when they are visiting Hong Kong? This would offer new opportunities for Hong Kong’s Jockey Club, already one of the biggest forces in global racing.

Horse racing in Hong Kong has long enjoyed a special status within the former UK colony. In fact, when Deng Xiaoping was in talks with the British government about the handover of Hong Kong’s sovereignty, he came up with the famous quote “horse racing will continue” after 1997 – his way of guaranteeing the city’s way of life would not change.

Hong Kong offers the most alluring model for those promoting legalisation of the sport in the mainland – the Hong Kong Jockey Club (HKJC) operates unimpeachably fair races, reports rising turnover and pays not only a huge tax bill, but also serves as the city’s premier philanthropic body (ploughing huge funds into social welfare projects).

Indeed, in the latter role it has been in the headlines recently for another big ticket scheme. The government has just come up with a proposal to create a new version of Beijing’s celebrated Palace Museum at a 42-hectare art and cultural complex on Hong Kong’s iconic harbour (see WiC351). The HK$3.5 billion museum is thought to be the brainchild of Carrie Lam, who is campaigning to become Hong Kong’s top official in March’s election for the chief executive position. The HKJC will fund it. Indeed, it has taken some heat from anti-Beijing legislators (who make the somewhat tenuous assertion that a museum the displays rare Chinese artefacts – such as Ming Dynasty vases – is a propaganda exercise).

But the multi-billion funding decision probably indicates the HKJC has an eye on the bigger picture. It wants to be on the inside track – as a trusted advisor – when Beijing finally opens up China’s horseracing industry and starts to allow betting. And it’s not hard to see why: multiply the Hong Kong experience across China’s 20 biggest cities and you’d soon have a racing industry worth trillions of dollars (as Macau illustrates, the Chinese do like a flutter). Usually, when a dramatic policy shift occurs, Beijing likes to trial it first in one of its cities. The most logical institution to run such a pilot scheme? It would need to be both an expert in the field and likely also Chinese. The HKJC must fancy its chances…


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