The Big Bet
Everyone is trying to cash in on China's gambling addiction. But does Beijing have an ace up its sleeve?
The Taiwanese islands of Matsu do not seem like an ideal spot for one of the world’s biggest casinos. Although they are ringed by rocky beaches and azure water, only about 10,000 people live on the 19 tightly clustered flyspecks, some 126 miles away from the main island of Taiwan. An Associated Press reporter who visited in 2012 described Matsu’s few shops as "a complex of decaying concrete structures that are most notable for their low-wattage gracelessness." Besides a small tourism industry, the islands’ chief draw is a sorghum-based liquor that, to the uninitiated, smells like embalming fluid.
Matsu is best known in the United States as a footnote of Cold War history. China and Taiwan fought a battle there in 1958 — Chiang Kai-shek’s Nationalist forces had held onto the islands in their 1949 retreat from the mainland — causing U.S. Secretary of State John Foster Dulles to float the idea of dropping a nuclear weapon on the People’s Republic in order to defend Matsu and the nearby island of Quemoy from communist incursion. As recently as 1999, tensions were high enough that Taiwan, fearing an invasion, ordered troops stationed on Matsu and Quemoy to cancel their holidays and remain at their posts.
Relations between China and Taiwan have improved markedly since then — in June, the residents finally cleared the last land mine from Matsu — and so have prospects for holidays on the islands. In 2009, in an attempt to encourage tourism and revitalize economic growth, the Taiwanese legislature passed a law allowing the outlying islands to vote on whether to legalize gambling. The idea is to take what has historically been one of the islands’ greatest vulnerabilities and turn it into a strength: At its closest point, Matsu is just a few miles from China — and its legions of big-spending gamblers.
Gambling is illegal in the People’s Republic, but its residents are some of the world’s highest rollers, both domestically, where they wager billions of dollars annually on underground games of chance, and abroad, where over the last decade a growing number of increasingly wealthy Chinese have driven a huge boom in casino construction and profit. Spurred by the success of Macau, the world’s hottest gaming spot, casinos have mushroomed in Singapore, the Philippines, and Australia. The consulting firm PricewaterhouseCoopers forecasts that the Asia-Pacific gaming market will net nearly $80 billion in 2015, more than double its take in 2010 — and investors and gaming companies are looking for the next best spot to capture Chinese clientele.
William Weidner, owner of an eponymous resort development company and former chief operating officer for gambling giant Las Vegas Sands, wants to make Matsu that spot. He first considered building a casino in Taiwan’s nearby Penghu archipelago, but after that island county’s referendum to allow gambling failed, he turned his attention to Matsu. As part of his charm offensive, Weidner has said he will spend $2.5 billion of the project’s $8 billion budget to upgrade the islands’ infrastructure and turn Matsu into a "world-class" resort. In addition to a casino, the project envisions elevated causeways linking Matsu’s two main islands, a university campus, a golf course, a ferry terminal (complete with luxury high-speed ferries), an expanded airport built on reclaimed land, boutique hotels, and Mediterranean-style villas for the visitors, the majority of whom the developers expect to be Chinese.
In April 2012, Weidner Resorts posted a slick Chinese-language public relations video (since been made private) on its YouTube channel, seemingly to impress upon Matsu’s residents the venture’s cosmopolitan nature. The video features glamour shots of Weidner with celebrities ranging from George W. Bush to Sylvester Stallone and promises Matsu locals "the opportunity to realize their dreams, create history … and create wealth for their future generations." To sweeten the pot, Weidner said in July 2012 that if the casino opens and hits its targets, he’ll pay each resident $609 a month — a sum that will rise to $2,670 after five years. The Matsunese bought the pitch, and that month the islands became the first Taiwanese territory to approve gambling.
Yang Sui-Sheng, the magistrate who oversees Matsu, is optimistic that the casino will be built, but he has no illusions as to why Weidner chose his tiny corner of the Pacific. "If casinos were legalized in China, there would be no chance that investors would come here," he says. This raises an interesting question: Why doesn’t China, with its growing wealth, consumption-driven economy, and huge unmet demand, take advantage of its own gaming market?
CHINA, WHERE NO VICE is legal but every vice is tolerated, has a complicated history with gambling. Like opium, it was rife in the early 20th century. Gen. Chiang Kai-shek, the country’s nominal leader in the 1930s and 1940s, saw gambling as a threat to his army’s morale and unsuccessfully tried to curtail it. After Chiang and his supporters made a run for Taiwan and Matsu in 1949, Mao Zedong took power in China and swiftly outlawed gambling, as well as other vices. But in the years following his death in 1976, drugs and prostitution re-emerged, and by the 1980s and 1990s, Chinese people could be found betting on everything from horse racing to soccer matches to cricket fighting.
Today, signs of gambling are nearly ubiquitous in mainland China. Tables for the rummy-like game of mahjong dot street corners around the country, while more serious wagering takes place in parlors that, like Chinese brothels hiding behind foot-massage signs and barber chairs, make little attempt to hide their purpose. "If you don’t play for a profit motive, it’s legal — but if you play to make money, that’s illegal," explains Chen Haiping, a researcher at Beijing Normal University’s lottery research center. But there are also much, much bigger games: In June, 17 people were indicted in Shanghai for the crime of opening an online casino into which they allegedly funneled $13 billion in bets.
There’s a rich Chinese tradition of legitimizing morally questionable behavior like gambling — you just call it something else. In the sixth century B.C., Confucius established his theory of the "rectification of names." He believed that social disorder stemmed from the failure to accurately perceive reality, and the solution was describing things as they are. Ever since then, the Chinese have tried to subvert Confucius’s dictum: Feet shaped by the excruciatingly painful process of foot-binding, for example, were called "golden lotuses." The communists under Mao were notoriously good at euphemisms. The famine caused by the collectivist government program known as the Great Leap Forward, which killed tens of millions of people, is referred to as "the three years of natural disasters." And euphemism remains the key to vice in China. Because a percentage of state lottery proceeds accrue to the Ministry of Civil Affairs, the lottery is not considered gambling but a legal, even beneficial, "social welfare" project.
Foreign gaming companies have tried to use this trick in their fitful efforts to penetrate the Chinese market. In 1993, for example, a Malaysian company opened a slot machine parlor in the dreary northeast city of Harbin, but because it paid out "gifts," not cash, it was licensed for "entertainment," not gambling, according to Hong Kong’s South China Morning Post. Harbin tolerated foreign slot machines for a little while — a 2010 article in a provincial newspaper described 1994 and 1995 as "the craziest era for gambling" in the city — until it formally banned the machines in January 1996.
In 1993, another Malaysian company said it had obtained a license to operate "electronic and electrical entertainment machines" in the nearby city of Dalian — an experiment that appears to have fared worse. Soon after the company announced the agreement, the city’s then-mayor, Bo Xilai — now best known for a 2012 political scandal involving coup rumors, attempted defections, and murder — said he was not aware of any such deal. He added that gambling was strictly prohibited and disapproved of by the central communist government, according to a report in the Straits Times, a Singaporean newspaper. "If a club with betting machines should open its doors in Dalian, it would be immediately closed, and you can consider that an official statement," a Bo aide said in July 1993.
That doesn’t mean that people in Dalian and Harbin actually stopped gambling or that enterprising businesspeople stopped providing them with illicit opportunities to do so. As China’s economy has grown, however, the stakes have gotten higher. In 2003, the disposable income of the average urban resident was about $1,000; in 2012, it was roughly $4,000. Chinese with the means to scratch the gambling itch go overseas; last year, Chinese people took 83 million trips abroad, on which they spent more than $100 billion. "The Chinese are now the partygoer everyone wants to invite," says Ben Lee, managing partner at IGamiX, a gambling consultancy in Macau.
Macau has laid out the red carpet — nearly 90 percent of its visitors are Chinese, says Martin Williams, Asia editor of GamblingCompliance, a market analysis firm. The tiny former Portuguese colony borders southern China’s Guangdong province; with the right travel permit, it is an easy ferry, rail, or plane trip from the mainland or Hong Kong. Once a sleepy backwater, Macau allowed foreign companies to open casinos in 2002. In just a decade it has become the world’s undisputed gaming capital, with revenue six times greater than Las Vegas. On the day that the Sands Macao, that territory’s first Las Vegas-style casino, opened in 2004, more than 20,000 people swept in, literally ripping the doors off their hinges. Over the next three years, gaming companies will build at least six more casino resorts in Macau, at a cost of $20 billion.
Most countries that abut China have built casinos to cater to the country’s legion of gamblers. Myanmar, Vietnam, and Laos host gaming resorts near the border "that exist just because of China," says Andrew Klebanow, co-founder of the consultancy Gaming Market Advisors. Singapore, which only allowed casinos to open in 2010, already hosts the world’s two most profitable, with 2012 gaming revenues of $5.9 billion driven by Chinese punters — just under the combined haul of all of Las Vegas’s dozens of casinos. Even Kazakhstan has gotten in on the game. The Astoria Club, for example, a gambling resort in a lakeside town outside Almaty, provides "a Chinese-language book of rules and tutorials," says the casino’s event manager, who asked to go by his first name, Batikhan. "Chinese visitors are welcome here, for sure!"
But Almaty is quite a trip for the roughly half of China’s population that lives along the country’s east coast — the Kazakh city is some 2,000 miles from Beijing — and investors and developers are looking for the next big opportunity to draw those visitors. Major casino projects have recently been announced in the Philippines and Vladivostok, the largest city in the Russian Far East, which is a short flight for many of the 120 million people who live in northeast China. Currently, their nearest legal gaming option is in the basement of the Yanggakdo International Hotel, on an island in a river in the middle of Pyongyang, North Korea. (South Korean casinos are somewhat farther but a lot more inviting.) If it is built, Weidner’s Matsu casino would be the closest option — and a much swankier one — for tens of millions of people in southeast China.
OF COURSE, BUILDING a casino in China would presumably be the most convenient option, but doing so has proved difficult.
In 2005, fresh off the success of opening the Sands Macao, American gaming magnate Sheldon Adelson announced in a statement that the nearby city of Zhuhai had selected his company, Las Vegas Sands, to "proceed with master planning" for a resort on the city’s Hengqin Island, and in January 2007 the company issued a news release noting that the local government had formed a committee to "advance the development" of the project. The island is right next to Macau, but unlike its neighbor is part of mainland China, so Chinese can fly or drive there without having to worry about Macau’s sometimes onerous visa regulations.
The resort might have been a good testing ground, serving as a beachhead that could eventually host a casino, if laws changed. But by 2008, with the economic climate worsening and the Hengqin project still not approved, Las Vegas Sands announced it had suspended its plans for the resort. In August 2012, the New York Times reported that a contractor hired by the Sands was the focus of a U.S. federal investigation for bribery; early this year, the company’s annual regulatory report acknowledged that it may have violated the Foreign Corrupt Practices Act, the U.S. law that prohibits bribing foreign officials. The company remains under investigation by the U.S. Justice Department and the Securities and Exchange Commission. (A Sands spokesman declined to comment.)
Gambling operations in China may have a greater chance of success a few hundred miles to the southwest in Hainan, China’s smallest province — principally composed of a large tropical island that administers the Spratlys and the Paracels, archipelagos whose ownership China disputes with several Southeast Asian countries. "It’s a linchpin to China’s regional policies," says Lee, the IGamiX consultant, so the central government wants it to be economically healthy. "They want to see Hainan succeed." Sanya, Hainan Island’s southernmost city, "has a number of large resorts," says Adam Pliska, president of World Poker Tour, which hosts and manages poker tournaments. "If you look [at them], they look like any nice casino in Las Vegas — minus one thing. There are no table games and slot machines, but it’s certainly ready."
Hainan has been flirting with legalizing gambling since at least January 2005, when four delegates to its provincial legislature submitted a resolution to legalize gambling to "increase employment and boost local economic revenue," according to an article in Beijing Youth Daily, a Chinese newspaper. That resolution didn’t pass, but in 2009 nearly 60 Hainan government officials suggested a partial easing of gambling restrictions. And in 2010, in a little-noticed report, the State Council, China’s cabinet, approved a resolution allowing Hainan Island to function as a "testing ground for China’s lottery and gambling industry." In December 2012, Pliska’s company was allowed to host a poker event, "which looks very much like what the government has prohibited in the past," he says. The event was held at the MGM Grand Sanya, a massive new resort built by the American gaming and hospitality company now called MGM Resorts International, which had tried but failed to build a casino on Hainan in the 1990s.
The closest Hainan has come to legalizing casinos came this past February, when Zhang Baoquan, a Chinese property tycoon, told Reuters about a cashless casino bar in his Mangrove Tree resort in Sanya. There, gamblers could exchange winnings for items like luxury goods, jewelry, artwork, and accommodations. Zhang told the reporter that China was not yet ready to legalize casino gambling, "but my personal opinion is, in future, there is a big possibility that they will have."
Two days after the Reuters story was published, Chinese authorities said they had shut down the casino. "We are investigating it, and so far it looks like they have violated their operating regulations," Chen Guangfa, the deputy director of the Sanya Culture and Sports Bureau, told the wire service for a follow-up article. In a July 23 interview, Chen told Foreign Policy that Zhang’s bar got shut down because "it offered entertainments that went beyond what our permits had allowed." Zhang declined an interview request. Chen added that the bar is now closed and "undergoing reorganization."
THE BENEFITS TO BEIJING of legalizing casinos are plain to see. Macau’s economy, for example, has grown dramatically in the last decade, and its citizens have hit the jackpot: The territory now boasts an annual per capita GDP of $78,275 — considerably higher than the average American’s income and more than 12 times that of the average Chinese. But while Macau captures an average of roughly $1.4 billion a month in tax revenue, according to Williams of GamblingCompliance, the central government in Beijing gets none of that windfall. With China’s economy expected to continue its recent slowdown — annual GDP growth dropped from 9.2 percent in 2011 to roughly 7 percent in 2013 — casinos could be a helpful source of revenue. "Of course I hope the government will open up the market for gambling," says Wang Xuehong, executive director of Peking University’s China Center for Lottery Studies. She believes legalizing gambling would help create jobs, bring in tax revenue, and allow Chinese enterprises "to participate" in the industry. Li Hai, associate dean of the School of Management at Shanghai University of Sport, agrees. "People’s demand is there. It’s a choice between blocking it and channeling it," he says.
But officials worry about the downside. Throughout Chinese history, there has been a fear that the central government will not be able to maintain its grip on power and that the provinces might go their own way (a sentiment captured by the centuries-old expression "The mountains are high and the emperor is distant"). Legalizing casinos would help provincial officials not only increase local tax revenues but also strengthen their power bases — something Beijing doesn’t want.
What’s more, high-ranking Communist Party officials are ardent students of their own history. Gambling was a major social disruption in the 19th and early 20th centuries — causing bankruptcies, breaking up families, and spurring other vices like opium use — and they fear that legalizing gambling would revive those problems. "The government’s main concern is its potential to disturb social stability and harmony," says Li. "It is a very sensitive subject." The Communist Party is also aware that casinos often attract organized crime — as they did in Macau, as well as Las Vegas, which for decades was controlled by the mob.
Teresa Du, a communications manager at MGM Grand Sanya, doubts there will be any "significant policy changes" for at least the next five years, which is "frustrating," she said. "Everyone knows MGM specializes in operating casinos, but the only thing we can do is send petitions to the government." (A spokesman for MGM Resorts International said Du’s comments "don’t accurately reflect the company’s views.") For investors, then, the key may be "to put your chips where they’re supposed to be," says Desmond Lam, a marketing professor and gambling expert at the University of Macau. That way, if gambling is legalized in China, "they are in a good place."
William Weidner appears to be taking the other side of that bet. "We think the likelihood of China allowing casinos, even in Hainan, is very low," says Jennifer Lee, vice president of Weidner Resorts Taiwan. But Matsu has its own complications. Although relations are much better than in the past, tensions between Taiwan and mainland China still flare up occasionally. In June, Taipei deployed a multiple-launch rocket system in Matsu to fend off a potential Chinese amphibious landing. The irony, one imagines, is not lost on Weidner, who’s hoping for a different sort of Chinese invasion.
Other obstacles stand in the way of this flood of tourists. Unlike traveling to Hong Kong and Macau, it’s actually not that easy for Chinese to travel to Taiwan. And in February, testy Chinese officials in nearby Fujian province suggested they might ban residents from visiting the Matsu casino. (Lee said such comments are standard and not cause for concern.) Yang, the magistrate for Matsu, admitted that officials are still trying to work out the visa situation.
The Matsu project has been met with skepticism by many in the industry. Lee says that other companies have looked at building casinos on Matsu but admitted, "As far as I know, their interest has not been very high." Steve Tight, president of international development for Caesars Entertainment, which has been eyeing the more-developed Quemoy as a potential casino site, says his company rejected the idea of trying to build on Matsu because it was not as "attractive" a spot for investment. "There’s no way [Weidner] can spend $8 billion on a small island," says one gaming analyst, who asked to speak anonymously. "That’s insane! He could spend that money, but there’s no way he could make it back."
In January, Weidner announced that he plans to build clusters of 30-floor hotels that would offer 26,000 rooms — as many as Macau’s total capacity and 13 times the number in Weidner’s original proposal for Matsu. Three months later, Weidner Resorts posted a new video on its YouTube Channel titled "Weidner’s Destiny, A Gem Now Awakening — Matsu, The Mediterranean of Asia." The video opens with old images of artillery fire, describes the economic benefits that a casino resort will bring, and ends with a statement from Weidner himself. "It’s time to change," he says forcefully. "Matsu is my destiny."