Talking Point

The house is still winning

Macau’s casinos seem untroubled by Xi Jinping’s campaign against graft

Looking chipper: Macau’s gaming revenues set a new record in March bucking Xi Jinping’s austerity campaign

An old Chinese proverb warns: gambling and robbery are neighbours. But in Yang Kun’s case, the allegation is that banking and gambling became very closely acquainted too.

Yang, a former vice president at Agricultural Bank of China, bridged the two worlds rather disastrously. Detained last April on allegations that he had made loans improperly, it now seems those funds were used to repay Rmb3 billion ($488.8 million) of debt to a casino in Macau. Yang is still under questioning.

After working at Agricultural Bank for 29 years and rising to take charge of its real estate lending division, Yang is also the recipient of an unlikely award: the most senior banking official to be arrested since the detention of Zhang Enzhao, the president of Construction Bank, in 2006. And for the moment, he is one of the highest profile catches for Xi Jinping’s ongoing campaign against official graft too. The question for the casino industry in Macau is whether Yang’s case is likely to be an isolated one, or the first of a stream of VIP arrests related to the territory.

Has gambling slowed in Macau since Xi began his austerity campaign?

Not particularly. Macau’s casinos had already generated more cash by the end of April than Nevada managed for the whole of last year. For the first quarter, revenues were up 14.8% compared to the same period last year, not as high as the best growth in earlier years but a healthy increase nonetheless, especially in light of the high revenue base. Macau took $38 billion in gaming revenue last year, or more than six times the amount in Las Vegas.

Admittedly, revenues in April fell slightly on the month before. But that was due to a new monthly record in March, with casinos collecting a further $3.92 billion.

Most analysts now expect revenue growth of about 15% for 2013, based on greater confidence in the Chinese economy and the increasing number of hotel rooms and tables coming online in Macau. It’s the kind of environment that saw Sands China announce buoyant results last week, with quarterly earnings up 63% to $453 million, helped by the opening of its Sands Cotai Central property last year (a 6,000-room resort delayed for three years by the onset of the global financial crisis). Since then, Macau’s fortunes have recovered strongly. Occupancy rates at hotels have been running at 95% and the average minimum bet at the tables has doubled in the past year to HK$600 or about $77 (the Hong Kong dollar is the currency used in Macau’s casinos).

So there hasn’t been a crackdown on VIP business?

Rumours about this started last year amid the febrile atmosphere surrounding the fall of Bo Xilai – including allegations in the Chinese press that bosses at a Macau junket had been detained as part of a probe into money laundering by Bo and his associates. That might even be linked to the case against Yang (supposedly, he is being investigated for his relationships with two other parties close to the former Chongqing Party boss). But twelve months ago the investor mood turned cautious on Macau’s casinos in general, partly through fears of slower Chinese economic growth, but also because of the political intrigue in the months preceding the announcement of Xi Jinping’s new leadership team.

Then in November Xi began his heavily publicised drive against waste and corruption among Chinese officialdom. Although Macau wasn’t specifically mentioned in the campaign, there were reports from unnamed sources in February that a clampdown was about to be launched. The news ricocheted through the gaming sector, prompting an immediate fall in Macau’s casino stocks.

Who are the VIPs that could be targeted?

HSBC says that up to 300,000 people can be characterised as Macau’s VIP gamblers and that they will contribute about 65% of gaming revenue this year, spending between $10,000 and $20 million each per trip.

Despite making up a small proportion of the 28 million arrivals in Macau last year, VIP gamblers spent more than $26 billion last year, almost all of it on baccarat, the overwhelming game of choice (see WiC’s December 2010 Focus Issue, Punting on Macau).

The massive majority of VIPs come from China, courtesy of junket operators, who work with local agents to attract the biggest-spending gamblers.

The players then gamble in Macau on credit provided by the junkets and repay it to the agents within six weeks of returning to China. This kind of financial support is essential: Chinese citizens can take just Rmb20,000 with them on each trip out of the country, nor are they supposed to exchange more than $50,000 worth of renminbi into foreign currency each year.

And Beijing wants to make it more difficult to gamble in Macau?

The Chinese authorities are keenly aware that many of these gamblers are playing with ill-gotten cash. But Macau has its own laws (and like Hong Kong, a separate government), as well as a freely convertible currency. Beijing is reluctant to tread too heavily across the border.

“Let’s imagine you have a casino in Nevada and most of your customers come from California,” Jorge Godinho, a professor at the University of Macau told American Lawyer magazine last week. “But let’s also imagine there is a border and no free movement of people and no free movement of capital and you can’t legally collect debts in California. So it’s a strange legal situation.”

Despite this, there was speculation last year that Beijing was growing exasperated at the worst of the excesses at the high roller tables and was getting ready for a tougher stance in the months ahead.

“They are taking a much more proactive role. The Chinese government is more concerned about assets being wasted,” a senior casino executive suggested to Reuters again last week. “For them, it’s not about the funds being gambled, but about businesses or factories being squandered.”

Also offered in evidence was the transfer of Li Gang, formerly a top Chinese official in Hong Kong, to China’s representative office in Macau. Li is also a member of the Chinese Communist Party’s Central Commission for Discipline Inspection, the entity tasked with rooting out graft among its members. It’s thought that his remit could target money laundering, as well as wealthy individuals who dodge China’s capital controls by routing funds through Macau.

In the same way that a junket agent might advance money to a gambler to play, government officials or businessmen wanting to get money surreptitiously out of China can hand cash to an agent on the mainland and access it in gambling chips once they get to Macau. Then they play baccarat for an evening or two, before choosing to cash out some of their chips in foreign currency, and transferring their funds further offshore.

For those nervous about their futures in China, Macau’s casinos offer one of the most convenient avenues for capital flight (see WiC185 for our article about increasing numbers of rich Chinese emigrating). Tam Chi Keong, an assistant professor at the Macau University of Science and Technology, told the Oriental Daily, a Hong Kong newspaper, that he believes that HK$1.57 trillion ($202 billion) in illegal proceeds is channelled through Macau in similar ways each year (a “conservative” estimate, he suggests).

“Every province, county, and autonomous region has at least one VIP room in one of the Macau casinos to facilitate their maniac money laundering activities,” Tam was quoted as saying.

In this context, speculation that the new leadership in Beijing wants to see more ‘sustainable’ growth in Macau has merit.

“We’ve seen attempts in the past, i.e. the freezing of new casino permits, the table cap and a couple of other measures. But we’ve seen the gaming industry has, in more ways than one, grown beyond the ability of the Macau government to control it,” Ben Lee, managing partner at gaming consultancy IGamiX, told Macau Business Daily last month.

So the amount of VIP play hasn’t been reduced?

Not according to numbers released by the Gaming Inspection and Coordination Bureau. In fact, revenues for the VIP sector in the quarter to the end of March surged 25% year-on-year, a significant improvement on the more modest 3% uplift in the final quarter of 2012, and much better than the 1% decline in the third quarter of 2012 too.

Then again, Li Gang’s tone hasn’t sounded especially confrontational. He arrived in the territory telling media that China’s crackdown on graft and its attitude to casinos “are not the same matter”, and promising that new efforts against corruption shouldn’t harm the gaming industry.

Soothing words from the man anticipated to become Beijing’s chief representative in Macau later this year.

If war really has been declared on the junkets, the opening shots have been very low-key indeed. Figures from Macau’s Gaming Inspection and Coordination Bureau (in February) indicate a record 235 junket operators now have licences, or about seven per casino. And, if anything, Beijing seems to be making more of an effort to co-opt the junket bosses, with Alvin Chau, boss at Suncity Group, selected earlier this year as a member of China’s CPPCC Guangdong provincial committee.

Newspapers have also reported that junket operators, representatives from Beijing’s liaison office in Macau and local regulators gathered for a fancy dinner at a new resort in the city last year to inaugurate a new trade body for the junketeers. “The association will strive to work together to keep society stable and the economy flourishing and transform Macau into an international city,” Hong Kong’s Apple Daily quoted the trade group’s new president as saying.

In the long run, the mass market is going to play more of a role?

A steady transition to more mass-market play is likely, with signs that some of the revenue gap on the elite gamblers is already narrowing. Mass play accounted for nearly a third of Macau’s gaming revenue in the first quarter, at $3.44 billion or 32.2%. That is already up on previous years, with the same segment making up 29.1% and 27.3% in the corresponding periods for last year and 2011.

Macau’s political bosses have always said that the plan is a more diversified gaming industry, even though VIP gamblers are going to contribute the lion’s share of revenue for the foreseeable future. In fact, casino bosses won’t mind seeing some of that decline in percentage terms. About HK$1.25 of a typical win rate of HK$2.85 in every HK$100 spent at the elite tables goes to the junkets as commission. What that means is that mass-market gaming provides well over half of the industry’s EBITDA, despite its smaller revenue contribution.

Demand from mass-market gamblers is also seen as less sensitive to fluctuations in economic growth (and the political mood). The bulk of Chinese have never visited Macau, which suggests a huge untapped audience still awaits the territory’s charms. Nor is this customer flow as dependent on credit as the high-roller players, which makes it less reliant on arrangements that can be harder to finance in tougher economic times.

That leads some analysts to recommend casinos that are less dependent on VIP spending for the future, like Sands China, which relies on the lowest share of high-roller revenue at 56%.

Even so, with billions of dollars already being waged by ordinary punters and minimum bets passing $75 at entry-level tables, the mass-market group is hardly small fry. Casino bosses seem particularly excited about the growth in the ‘premium mass’ business, or customers waging minimum bets in the $258-$390 range. Even these players need informal financing arrangements in Macau, it seems, relying on pawnshops where they buy valuables with their China debit or credit cards. “We’ll then refund them in Macau patacas or Hong Kong dollars in cash as if they had decided to sell the goods immediately,” one salesman told Bloomberg, with the shop taking up to 10% of the refund as commission.

Macau’s epicentre is also shifting to the Cotai Strip, a sandy landfill connecting the two islands of Coloane and Taipa. Mass premium business is clearly a target audience for much of what is being developed here. All six of the casino concessionaires are currently building thousands of new hotel rooms and hundreds of new tables on Cotai, something that Macau desperately needs because it is running so close to full capacity.

And that means the VIP share will decline?

That’s the politically correct opinion, although Ben Lee from IGamiX told Macau Business Daily that he isn’t totally convinced that the VIP sector will lose its dominance as quickly as some might hope.

The problem is that the forces pushing Macau in the direction of VIP revenue are still so strong. “For starters, a small handful of big players will always drive the market and move the direction, the needle, in favour of the VIP,” Lee warns.

“Number two is that we are right next door to China and we are the only destination for Chinese high-rollers where the procedures and channels have been established for a long time, and are very easy for them to be able to gamble in Macau.”

“And number three is that business conditions in Macau offer the ability to offer players credit and have the ability to collect on that credit at a later point in time.”

None of the other gaming destinations can offer the same cocktail of attractions to China’s gambling elite. In fact, the biggest long term threat to Macau could be an entirely different policy highlighted in Beijing this week: currency convertibility. On Monday the State Council promised to unveil an operational plan for the renminbi’s full convertibility and introduce a comprehensive channel for individual outbound investment by the end of 2013, says HSBC. If China’s rich could (some day) move their money offshore – unrestricted by the current capital controls – Macau might start to lose more than a few of its biggest spenders.


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