With Macau on virtual lockdown last week for a visit from President Xi Jinping, it appears December will add to the pressures that have kept high rollers away from the baccarat tables through most of 2019 and dragged gaming revenues into negative territory for the first time in three years.
The Communist Party leader was in town three days to mark the 20th anniversary of Macau’s return to Chinese sovereignty after nearly five centuries of Portuguese rule.
The celebrations included the inauguration of Ho Iat Seng as Xi’s hand-picked chief executive. He is the third executive in the city’s history as a self-governing “special administrative region” (SAR) of China, as both Macau and Hong Kong are known.
Macau’s loyalty to the constitutional principle of “one country, two systems” has stood in somnolent contrast to the anti-Beijing protests that have rocked Hong Kong for months. As a hedge if things go terribly awry in its unruly sister SAR, Xi’s visit was accompanied by a number of policy initiatives aimed at developing Macau as a secondary financial center for the Pearl River Delta region.
These include establishing a yuan-denominated stock exchange and accelerating a renminbi settlement center already in the works. “The financial industry used to be an idea that we reserved for Hong Kong,” said a Chinese official who spoke with Reuters anonymously. “We used to give all the favorable policies to Hong Kong. But now we want to diversify it.”
Two officials who helped develop the Shanghai Stock Exchange moved to Macau this year to help with the nuts and bolts, according to sources cited by the news agency, and Beijing has instructed state-owned banks and businesses to lend a hand.
The stock exchange had been in discussions for some time, but it’s taken on fresh urgency as Beijing grows anxious to avoid any major market disruption in Hong Kong that could hurt Chinese businesses.
“Xi Jinping has made it very clear that he wants a diversified Macau economy,” another Chinese official said. “The future focus will be on tourism and finance, to make it a center to host international meetings, like Singapore.”
In a client note issued last week, analysts with brokerage Sanford Bernstein said, “We do not view these policy initiatives as supportive directly of the gaming industry in the near or medium term. However, overall support for Macau by the PRC (Peoples’ Republic of China) is positive, and it is less likely that there will be any policy measures directed specifically at reigning in the gaming industry (in light of VIP weakness and Hong Kong turmoil).”
While there is nothing new in this, it appears Beijing intends to be more proactive in binding the city closer to the mainland economically, while simultaneously steering it away from the history of the last two decades, when Macau morphed into the largest pure gambling market in the world. More than 70 percent of total visitation last year originated from the Chinese mainland, mainly from the south of the country, from close-in markets in and around the populous Pearl River estuary, and mainly from neighboring Guangdong Province. In terms of gaming win, the market has grown to outstrip Las Vegas seven times over, and the 35 percent tax on that win accounts for 80 percent of the government’s revenue.
But then, this where the central government holds all the cards. Six years ago, Xi launched his young administration with a nationwide crusade against corruption and lavish spending within the ranks of the Communist Party and the state-owned enterprises. There were arrests, trials, demotions. It scared off Macau’s high rollers en masse. At the height of the purge, gaming revenue went negative for three straight years, plunging in 2015 by 34 percent.
Nothing nearly as radical is being contemplated these days. But it was a frightening reminder, as Warwick Bartlett of UK-based Global Betting and Gaming Consultants told GGB News, “The growth of Macau relies on the political whim of Beijing. With 1 billion Chinese citizens as a market it is quite possible for Macau to produce double-digit growth if Beijing wishes to allow it.”
Revenues were edging down year-on-year by close to 3 percent through November, but not because of political policy𑁋although the junkets have been stepping warily after giant Sun City was called out in a state-sponsored news outlet earlier this year for promoting illegal online and proxy betting. Rather, the weakness stemmed from a broad fall-off in VIP volumes connected mostly to concerns surrounding China’s economy.
As Brendan Bussmann, director of government affairs for Global Market Advisors, a U.S.-based industry consultancy, explains it, “You have to factor in (the political turmoil in) Hong Kong. But it’s mostly the overall Chinese economy, which has taken a hit. You’ve got the trade war. And what we’re seeing is the lowest growth since the early ’90s.”
A Future ‘Ex-VIP’
The negative impact from Xi’s visit was not unexpected, but, as Sanford Bernstein said, “The impact has been more severe than we initially expected.”
The brokerage noted that visa controls limiting visits to the city from the mainland were imposed weeks beforehand and were followed last week by reductions in ferry service from Hong Kong and “significantly increased security at the border crossings.” The city’s newly opened Light Rail Transit system was shut down. Cash flows were tightened as street-level money changers and lenders came under greater scrutiny, and security was heightened around “underground banking movements.” There were even worries that ATMs would be allowed to run out of cash. This proved unfounded. “But rumors have an effect on people in any event,” the brokerage said.
“I don’t think visa restrictions alone have a material impact on the game’s gross revenue,” local casino consultant David Green told Macau Business magazine. “What can really have an impact, however, is the biggest concern about the growing vigilance and active policing. Some high-value players may prefer to be left out during this period rather than being seen playing actively.”
As Pedro Cortés, an industry attorney, put it, “The VIP player is not very fond of being identified and, in these circumstances, not because he is committing any illegality, but because he values his privacy and is discreet in nature, it is natural to avoid traveling to Macau.”
Through November, gaming revenue was down 2.4 percent year on year, with November finishing at minus 8.5 percent and down 13.5 percent sequentially. It was the second-worst month of the year after August’s minus 8.6 percent.
Through mid-December, analysts with Jefferies & Co. estimated mass market revenues down 3 percent to 5 percent and VIP volume down by upwards of 33 percent. They expect the trend to result in a total decline for the month of 14 percent to 17 percent compared with December 2018.
Sanford’s analysts likewise expect December to finish down more than 15 percent, with VIP’s decline in the high 20s and mass declining for the first time since early 2016.
They were quick to note, however, that mass remains on a solid growth trajectory, up an estimated 20 percent in the fourth quarter over the same period two years ago.
The Jefferies team is optimistic as well. “For now, the weakness should be well understood and should have little impact on the stocks. What’s more, we believe the beginnings of a trade deal between China and the U.S., while not comprehensive as yet, should indicate an economic rebound in 2020, which would impact the higher-end play in Macau.”
Global Betting and Gaming Consultants is modeling revenue growth market-wide over the next few years at 4 percent to 5 percent, a climb-down from recent years, but healthy nonetheless.
“The operators are broadening their offer, and have been doing so for some time,” Bartlett said. “There is more family entertainment, better MICE facilities, and in that respect, Macau will gain from the troubles in Hong Kong. The Macau casino operators have been adjusting to an ex-VIP market for some time.”
In essence, Bussmann agrees. “With VIP, you’ve seen an ebb and flow over the years,” he told GGB News. “There is plenty of room for growth in this market. It just depends on how you define it from a gaming or non-gaming perspective.”
In the long run, the policy initiatives announced ahead of Ji’s visit could prove immensely valuable by attracting a greater diversity of visitor, and from farther afield, one who may stay longer and is not solely interested in gambling.
‘Example of Reunification’
The new stock exchange will initially be geared to bond trading to encourage local and Chinese companies to issue debt in the city, according to a Chinese official who spoke with Reuters. It will also focus on start-ups and target companies from Portuguese-speaking countries and is expected to include Macau’s membership in the Beijing-backed Asian Infrastructure Investment Bank.
Additional land awards on Hengqin Island will allow the city to promote development in areas such as education and health care, and there could be spillover benefits for the casino concessions, which are forever eager to show Beijing they’re on the team and more than willing to invest in fresh development opportunities—in part, to help offset the slump in gaming.
Which is not to say the central government’s desire to wean its SAR from its gambling dependence will be easy. In addition to their dominance of public revenues, the casinos and their junket partners accounted for more than half of all industry in the territory last year, growing 14 percent against an aggregate economic growth rate of only 4.7 percent and dwarfing the combined contributions of real estate, construction, wholesale and retail trade, financial services and public administration, according to official data documented recently by the English-language Macau Daily Times.
Moreover, while the industry itself has evolved tremendously in terms of the total resort experience it can offer, non-gaming spend remains insignificant, accounting for less than 10 percent of total revenues last year𑁋and that’s under a new formula for calculating non-gaming that had the effect of bringing it up to the government’s goal of 9 percent; it would have been less than 7 percent under the old formula.
What China and its loyal local government can count on, though, is that Macau will serve as a symbol of the genius of “one country, two systems,” as Beijing likes to see it, a compliant outpost of the PRC and a counterweight to the embarrassing restiveness of Hong Kong.
In this respect, some see the stock exchange and the rest of the economic initiatives as a reward for toeing the official line. “This is the candy that Hong Kong did not want,” said Larry So, a former professor with the Macau Polytechnic Institute and a frequent commentator on the local political scene. “It is a gift for Macau, for Macau being a good boy.”
Obviously, the policies are not expressed in these terms. But then, they don’t have to be.
For one thing, there tends to be a greater natural affinity for the home country among Macau’s population, arising from the fact that more than half its residents are ex-mainlanders who emigrated after the handover. Hong Kong’s population is 10 times larger and mostly locally born.
This mainland ties also tend to nurture a generalized apathy politically whose roots can also be said to extend way back to a legacy of disinterested Portuguese administration governed by the Napoleonic Code and lax for the most part and for the most part placidly corrupt.
Hong Kong protesters have been known to wave the colonial flag in Beijing’s face, with its Union Jack emblazoned on a field of blue. This would be unheard of in Macau.
Economically speaking, there is even less incentive to rock the boat.
The post-handover casino boom has brought full employment at high salaries relative to other unskilled jobs, and the government does its part by restricting croupier positions to Macau residents. Employment security with the casinos is virtually ironclad, layoffs are unheard of, and the concessions make sure to regularly dole out lucrative bonuses equivalent to a month’s salary or more. Residents also receive an annual subsidy from the government, which is supplemented with handouts from pro-establishment community associations, and, as the Daily Times notes, millions of dollars have been invested in fostering youth groups linked to the Chinese government.
As Ho Iat Seng stated with confidence in a November interview with state broadcaster China Central Television, “Macau will be an example of China’s reunification.”
