Rolling the Dice in Macau: Gambling Capital of the World

After a rapid expansion in Macau, now the gambling capital of the world, recent government restrictions and anti-corruption efforts are shaking up financial projections as casinos diversify further into other forms of entertainment.

A growing appetite for gaming

gambling capital of the worldMuch of the earliest evidence of gambling in human history is found in China, including the ancient betting game of Wei-Qi, which dates back to about 3,000 B.C. Keno was one of the world’s first lottery-style games, and other Chinese games like Mahjong remain popular today. But many rulers, starting with the Xia and Shang dynasties, were wary of potential social ills that gambling could bring about, most pointedly when soldiers would let gambling habits get in the way of their duties. Into the 18th and 19th centuries, it was often associated with illegal activities, secret societies, corruption, and drugs. Hence, commercial gambling has been largely banned throughout the recent history of China and remains illegal today.

But as the Chinese economy has grown enormously over the last two decades, the country’s expanding middle class and wealthy elite have provided significant demand for gaming. Las Vegas has been courting these VIP players for years now, with many individuals providing millions in casino revenues annually. But far from the well-known gambling haven in the middle of the Las Vegas desert, a new casino capital has risen, fueled largely by new Chinese demand.

Macau’s rapid buildup

Special Administrative Region Macau, which was a Portuguese colony until 1999, had legalised gambling as a revenue generator to fuel development. Although legal since the 1850’s, the industry really took off in the 1960’s when the Sociedade de Turismo e Diversões de Macau, a syndicate of businessmen from Macau and Hong Kong gained monopoly rights to all forms of gambling, bringing in western-style games and upgrading transport infrastructure between Macau and Hong Kong.

Although limited betting on horse racing, soccer matches and lotteries is legal in Hong Kong, and social gambling is legal throughout most of mainland China, Macau has been the only serious, high-stakes casino gambling outlet in the region. Efforts to legalize commercial gambling in other parts of China, most recently in Hainan, have so far proven unsuccessful. This combination of easy access and relative exclusivity has led Macau to soar past Las Vegas as the world’s largest center for commercial gaming. Surpassing Las Vegas’ gambling revenues by 2007, Macau brought in $44 billion in 2014 (7 times Las Vegas’ revenues in the same year). It’s been crowned the gambling capital of the world and has developed at an astonishing pace as investors try to mark out a share of the enormous inflows of cash.

Money laundering and a recent crackdown

But the momentum behind Macau’s seemingly unstoppable growth quickly diminished in 2015, as the Chinese government stepped up efforts to curtail money laundering and corruption. Macau’s growth had been fueled primarily by China’s VIP high-roller individuals, rather than the mass tourism of Las Vegas. China’s tight restrictions on money leaving the country led to a high demand for ways to do exactly that, and these strict currency controls have been regularly avoided in Macau by a makeshift “junket” industry and a willingness among casinos to turn a blind eye. These junketeers lend high-rollers money, arrange accommodations, take a cut, and then collect debts through practices ranging from informal to insidious, since gambling debts cannot be collected through mainland China’s court system. Winnings are paid out in pataca, the Macanese currency, which can then be deposited in foreign banks or used abroad more liberally than Chinese yuan. Additionally, many wishing to take their yuan elsewhere would use the mainland currency to buy high-priced items in Macau and then return them for mataca.

But an anticorruption campaign from the Communist Party in China that targeted many of the mainland gamblers that would frequent Macau’s VIP rooms has effectively sent a strong message to others, prompting a quick dip in demand. At the same time, new liquidity restrictions on the junket industry have made it far more difficult to find the long lines of credit typically extended throughout the boom years. With USD $20 billion in ongoing construction projects, Macau is now scrambling to find ways to rejuvenate its narrowly developed economy.

The future: diversified entertainment?

China’s president Xi Jinping and other government officials in Beijing are now calling for Macau to diversify its entertainment offerings, with the anticorruption efforts, liquidity restrictions and even casino table limits as “stick” mechanisms. New developments like $3.2 billion Studio City are aiming to capture value through differentiated hospitality and theme-park style entertainment, mimicking Las Vegas’ shift over the last few decades toward a revenue structure that relies less on gambling. It appears to be the only way forward for Macau investors, but it’s an uphill battle nonetheless. Macau’s distinct competitive advantage has been its status as a deregulated gambling hub within a giant desert of gambling prohibition. It’s far less suited to compete with regional destinations on pure tourism attractiveness, especially with an increasing overcrowding problem and a lack of thorough infrastructure.

Potential investors should expect a slow recovery of Macau’s economy as developments continue and the Special Administrative Region retains its exclusive status among the few gambling destinations near China’s high demand. But some are speculating that the Communist Party of China may even entertain the idea of slowly lifting the ban on gambling throughout the country in order to keep some of the homegrown demand within its own borders. Either way, look for others, such as Singapore, the Philippines, South Korea and Australia, to compete for this business as Beijing and Macau continue to butt heads.

Evan Doremus
MBA Candidate 2016