A losing hand?

Regulatory storm reaches Macau and HK

Casino w

Sun Hong Kai PropertiesMajor changes in the casino enclave of Macau have been expected for months, with the current gaming licences due to expire next June. But when the Macanese government announced a formal review of the city’s gaming law last week investors took fright, wiping out more than a quarter of the value of the six casino groups listed in nearby Hong Kong.

Why the fearful response? When the gaming law was last revised in 2001 the stipulation was that the licences – known locally as concessions – were granted to three operators. The rules were then fudged to allow “sub-concessions” for three more. It’s now clear that these sub-concessions (held, for instance, by MGM) won’t be continued under the new regime, but the casinos holding them are expecting to get full licences under the revised framework.

Other changes to the licencing system have been widely anticipated as well: new concessions will be granted for less than the current 20 years and the registered capital required of licence holders is likely to increase, perhaps substantially, beyond the existing $25 million.

Investors in American casino groups like Wynn and Sands China have been fretting that they will be dealt an inferior hand because of the political crossfire represented by Sino-US relations (see WiC431). The casinos will probably have to show an increased proportion of Macau residents as shareholders. The proposals are also hinting at more interference across the board, with all the operators facing new controls on their distributions of dividends, plus the appointment of government representatives to their boards.

Commentators have countered that the changes aren’t as intrusive as they look because the gaming companies already work so closely with the authorities. And although the consultation process seems abrupt (just 45 days in total, with a single session on Monday for the casino companies to give their views), there has been ample opportunity for back-channel discussions.

In fact, there probably isn’t much going on that has surprised the casino bosses, with plenty of continuity around calls to widen Macau’s appeal beyond gambling, as well as a commitment to tightening controls of the more shadowy junkets that bring in the VIP players from mainland China.

That investors reacted so negatively last week says more about the wider context, perhaps, following months of intervention from the Chinese government in sectors as varied as fintech, ride hailing, online video gaming, education and entertainment. The determination is to curtail some of the corporations deemed too powerful in their industries. Indeed, a similar sentiment stirred a sell-off in the shares of Hong Kong’s property heavyweights on Monday as well, following reports from Reuters last Friday that real estate developers have been warned that Beijing is no longer willing to tolerate what it terms as monopoly behaviour. “The rules of the game have changed,” a source close to mainland officials, told the news agency.

In a statement, SHK Properties, Hong Kong’s biggest homebuilder, said it hasn’t heard any of the information suggested in media reports that Beijing is putting pressure on local property firms. The Real Estate Developers Association of Hong Kong said it was unaware too of any meetings between Beijing officials and its members.

By design, Macau’s casino law limits the competition on offer. Yet operators must be concerned that the relationship with policymakers could still take a turn for the worse, particularly when some of the crackdowns of recent months have taken a moralistic tone in targeting children playing video games and reining in the wealth of the country’s ‘wayward’ movie stars. If sectors like these are being censured, what are the chances of China’s ‘city of sin’ escaping unscathed, given its reliance on gambling?

China’s government is also focusing on a fairer spread of economic opportunity through the ‘common prosperity’ campaign – a mantra that sits uneasily with the rarefied (and sometimes questionable) riches of Macau’s high-roller casino players.

The subtext is that Macau cannot continue to flourish without a buoyant gaming sector, however. Officials said as much again last week in citing the need to retain scale in the city’s gaming landscape (interpreted by some analysts as a clear signal that all six big casino players are going to keep their licences). Gaming delivers more than 80% of Macau’s GDP, HSBC’s Charlene Liu pointed out in a research note this week. Those still buying casino shares hope that this kind of contribution means that the changes won’t be too radical.

There is overlap here with Hong Kong, where the mood music has turned negative on the concentrated market power of the big property tycoons.

Just as Macau needs its casinos to be firing on all cylinders, Hong Kong sees its real estate sector as a bellwether for its economic health. And because the real estate giants are so intertwined with Hong Kong’s economy, it will be difficult to sideline them completely, pointed out CY Leung, the city’s still influential former political leader. “They are a major component of our political and economic ecosystem, so we need to be careful,” he warned Reuters. “I think we need to be judicious with what we do and not throw the baby out with the bathwater.” Hong Kong property tycoons will hope Leung has formed this nuanced view after consulting with the people in Xi’s orbit wielding real power in Beijing today…

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