Don’t Show Me the Money

Gambling may be legal in Macau but the odds are not looking good for Chinese high-rollers. While Beijing’s anti-corruption push has battered the sale of moon cakes and luxury spirits, even harder hit seems to be the former Portuguese enclave of Macau, where corrupt Chinese cadres once squandered, multiplied, or simply laundered their loot. A large portion of Macau’s VIP business has evaporated as Chinese high rollers abstain from gaming or seek out other gambling destinations further from home.

The territory, situated just an hour’s ferry ride from Hong Kong, had been booming: revenues for the region’s 35 casinos in 2013 topped $45 billion — seven times the revenue pulled in on the Las Vegas strip. Gross domestic product per capita in Macau has grown sixfold since the Portuguese returned the territory to China in 1999, hitting $91,376 in 2013 — making it richer than Luxembourg, Norway and Qatar. This comfortable fortune was built on a steady flow of Chinese visitors, who make up 70 percent of arrivals to the Asian gambling mecca. More than 10 million Chinese visited Macau in the first half of this year, drawn by legal gambling, which is outlawed in mainland China. And in October, 1.6 million Chinese arrived, an increase of 6 percent from the same period last year.

But while an increasing number of Chinese are visiting the tiny territory, declining casino revenues reveal that the arrivals are not gambling the way they used to. Government statistics released Nov. 3 showed that Macau’s gross monthly gaming revenue fell to $3.5 billion, down 23.2 percent in October compared to the same month last year. It was the fifth straight month of decline, and the biggest drop on record in terms of percentage and dollar values. Nearly everyone, including U.S. casino magnate Steve Wynn, CEO of Wynn Resorts, which operates Wynn Macau in the territory, blames Chinese President Xi Jinping’s tough anti-graft crackdown, launched at the end of 2012, for the precipitous downturn. Fear of being caught in the anti-graft net is keeping Chinese away from Macau’s casinos. In a teleconference call after Wynn Resorts Ltd earnings were announced on Oct. 28, Wynn told analysts that Beijing’s policy "in being very, very aggressive about what appeared to be a misconduct and corruption of the government has put a lot of the wealthy businessmen in the foxholes." With China touting its cleanup as a way to sweep away "tigers" (corrupt high level officials) and "flies" (lower ranking dirty cadres), Wynn’s foxhole metaphor made for an even more crowded mental menagerie. But his gist was clear: Chinese are hiding out and too nervous to gamble.

Over the last two years, Xi’s anti-corruption team has investigated at least 182,000 officials for graft, and arrested at least 32 with ranks of vice minister or above. The crackdown has sent a chill throughout the Chinese business community, hammering luxury sales and other types of conspicuous consumption. With China’s anti-corruption czar Wang Qishan pledging a never-ending war on corruption, it remains unclear where the bottom will be for Macau’s VIP casino business, or whether it can make up the shortfall by catering to a much bigger clientele of small rollers who come to shop, eat and be entertained.  Alex Choi, an assistant professor in public administration at the University of Macau told Foreign Policy that the latest numbers have people in the territory worried. He said it marked the biggest drop since Macau legalized gaming in 2002, and worse than the territory’s recession in 2009.

Choi said that the downturn has also put a damper on the territory’s worker movement, which staged a series of protests and strikes earlier this year that won wage raises and other concessions from several casinos. But now, fearing a backlash due to the revenue slump and fearing they will be associated with the unrest in neighboring Hong Kong, the labor demonstrators are laying low, Choi said.

The rest of 2014 won’t be pretty though, particularly with a significant anniversary looming. Grant Govertsen, an analyst with the consulting firm Union Gaming Research, wrote in a Nov. 4 note that he did not expect revenue to rebound before the end of the year — particularly since Xi will visit Macau in December to mark the 15-year anniversary of Macau’s return to China. (Hosting Xi means Macau will likely be on high alert for any suspicious activity.) Meanwhile, gamblers who don’t want to be seen will stay away around the time of the president’s visit.

Don’t weep too much for Macau just yet. The decline has been steep because it’s from a pretty high base. The $45 billion that Macau raked in 2013 in gambling revenue was an increase of 18.6 percent from 2012. As for how far the economy will slide, Choi said that people in Macau refuse to believe the anti-corruption campaign will last forever and he noted that many casinos are developing new properties on the Cotai strip that will begin opening soon. "New casinos will start business next year and will pull in new visitors," he said, adding that the mood in Macau is one of "cautious optimism that the total revenue will rebound next year. 

But in mid-September, Credit Suisse analysts Kenneth Fong and Isis Wong said that they expected China’s anti-corruption push "could leave a permanent dent on demand in Macau." This has apparently been a boon to other gambling hotspots. Wong and Fong said "gaming destinations including Philippines, Australia and Las Vegas had demonstrated strong VIP" demand in the second quarter of this year. 

And it’s a bad sign when the territory’s finance secretary, Francis Tam, says publicly to expect more gloom on the horizon. Investor’s Business Daily, a U.S. weekly focused on finance, quoted Tam telling Macau media that he didn’t expect casino revenue’s to recover until the second half of 2015. On his early November call with analysts, Wynn said he was still "very bullish" on Macau — but he didn’t sugarcoat what a tough time the industry is currently having. Asked whether he thought things were getting worse, he replied: "It’s worse in October than it was before October. So if you’re asking what is the nadir of our experience, it is current."