CHANGING THE ODDS

Macao ended a 45-day public consultation on October 31 with its six casino operators ready to rebid for their licenses which are due to expire in June 2022. The consultation text outlines nine major changes to the city’s Legal System for Casino Gaming Operations, including the number of licensed casino operators, licensing periods, the capital threshold for gaming companies and the addition of government representatives to staff. 　

Signaling tighter regulations ahead, the consultation text released on September 14 sent stock prices of Macao’s six operators plunging between 20 and 32 percent. 　

Gaming has been legal in Macao for over 150 years. In 2001, two years after Macao’s return to China, the newly formed Special Administrative Region (SAR) government ended the city’s 40-year monopoly on gambling rights and opened the market to Hong Kong and foreign-funded companies. 　

Three operators – Galaxy Entertainment, Wynn Macau and SJM Holdings – received licenses. They are known as “genuine cards.” Applying through the government, they each extended their licenses to partners: Galaxy Entertainment to Sands China, SJM to MGM China, and Wynn to Melco Entertainment. This created a round of “second cards,” which have the same rights as genuine cards. 　

The monopoly breakup led to the highspeed development of the gambling industry. In 2006, Macao surpassed Las Vegas in revenue, becoming the largest gambling market globally. Between 2003 and 2019, the number of casinos in Macao grew from 11 to 41 while the number of casino tables increased from 424 to 6,739. The city’s gross revenue from gaming also rose from 30.3 billion patacas (US$3.8b) to 293.3 billion patacas (US$36.7b) by the end of 2019, according to the consultation text. 　

However, experts say the singularity of Macao’s economic structure and illegal capital flows from the Chinese mainland have prompted the latest adjustment and strengthened supervision. With the revision pending, experts speculate whether the law will bring changes similar in scale to those two decades earlier, and to the industry’s dominant role in Macao’s economy. 　

The document proposes, for example, to limit the number of licenses and forbid the transfer of operating rights. This may prevent “second card” operators from entering the market. It also seeks to shorten the 20-year license period to increase competition and attract new investors. 

Wang Changbin, a professor at Macao Polytechnic Institute specializing in gaming tourism, does not see the number of licenses increasing. “Otherwise, it gives the impression that Macao is expanding the gaming industry,” Wang said. At the same time, he does anticipate a shortened license period. 　

The document proposes to strengthen the review mechanism for approved companies, gambling intermediaries and their partners, and increase qualification standards for employees and sub-contractors. It also aims to introduce government representatives to gaming companies who will “enable the SAR government to better supervise the operations of casino companies,” and clarify criminal behavior and punishment involving illegal cash deposits. 　

Wang said that government representatives, who are already present in Macao’s horse-racing companies, will only serve supervisory roles and have no voting power. However, some experts say they could have a direct influence over operations. 　

Chen Zhangxi, professor of economics from Jinan University in Guangzhou, Guangdong Province who focuses on Macao’s economy and society, noted that the major points listed in the consultation text suggest attempts to tighten regulation. 　

Chen said it is time for Macao to step up supervision of its gambling industry. Ever since the first licenses were issued, more capital has been trying to enter the market. Some companies succeeded by cooperating with licensed operators. These companies, known as junket operators or intermediaries, open casinos with license holders or are subcontracted to operate VIP (high-roller) casinos. While technically legal, both are difficult to regulate. This is especially true for VIP casinos, which make up half the total revenue of the region’s casino industry. Many VIP casinos attract deposits illegally, as they need to extend large credit lines to their high-rolling clientele. 　

In 2014, Huang Shan, a famous agent who helped VIP casinos attract customers, made headlines for absconding with billions of US dollars from investors. Huang claimed to be the shareholder of several VIP casinos, offering credit to customers while attracting investments by promising high interest rates. But when the borrowers failed to repay, Huang fled. 　

This scandal exposed bubbles in the industry and hurt the reputation of junket operators. While Guo Zhizhong, director of Macao Casino Intermediary Association, says that agents who help bring in clients are more to blame for the industry’s woes, he agrees that supervision should be strengthened, including raising the threshold for market access and making clear the regulations on attracting deposits. “After all, the law was made 20 years ago. The gambling industry in Macao has undergone a lot of changes. Strengthening regulation will help reshape the image of the industry and help it develop more healthily,” Guo said. 　

Experts cite the huge flow of illicit capital from the Chinese mainland as another factor behind the intensified supervision. Mainland tourists are the major source of customers for Macao’s gaming industry. In 2019, about 28 million of the overall 39.4 million tourists to Macao came from the mainland, a whopping 70 percent. In previous years, Macao’s pawnshops could bypass the mainland’s foreign exchange controls by offering cash for credit card charges. 　

Ye Guiping, director of the Research Centre for Social and Economic Development under the City University of Macau, noted that the flow of money from the mainland to Macao, an international free port, poses risks to China’s financial security. He said that based on 2019 revenues, among the six casino operators in Macao, US-funded casinos (Sands, Wynn and MGM) are more profitable than local ones. The combined revenue for all of US-funded casinos accounts for about half of the gambling industry in Macao. 　

In June, Macao’s gaming regulator, the Gaming Inspection and Coordination Bureau (GICB), restructured several of its departments and doubled the number of inspectors to improve its supervision and coordination capabilities. 　

Gaming dominates the local economy. In 2019, tax revenues from the gaming industry accounted for 85 percent of the city government’s income and 55.5 percent of Macao’s GDP. In 2020, the gaming industry made up 17.23 percent of overall employment. 

　

Chen Zhangxi noted that after opening up the gambling market, Macao relied on gaming like never before. Its previous pillar industries, such as clothing and toy manufacturing, rapidly dwindled. The city’s secondary industry (including manufacturing and construction) decreased to less than 10 percent, and has been below 8 percent since 2009. 

　

The coronavirus pandemic fully exposed the vulnerability of Macao’s over-reliance on gaming. Macao’s casinos usually run 24 hours a day, only closing for typhoons. But in February 2020, casinos closed for 15 days, their longest closure ever, and have since struggled to restore their former business. Macao’s Chief Executive Ho Lat-seng said in his first policy address in April 2020 that Macao would be in the red for the first time since its return to China. GICB statistics show that in 2020, gross revenue of the gaming industry dropped by 79.3 percent from the previous year, while the region’s economy contracted by 56.3 percent. 　

Ho points out that maintaining the steady development of gaming remains crucial to ensuring economic stability in Macao. But long-term over-reliance on gaming and the singularity in Macao’s economic structure will make it hard for the region to realize sustainable development, Ho said. 　

This problem has been pointed out repeatedly over the past two decades. In 2016, Macao government said in its midterm review report of the casino industry that Macao’s economy and employment relied too much on gaming. But despite continuous calls for diversified development, the effect has been limited. 　

Ho Lat-seng mentioned in his first policy address that the proportion of new emerging industries is low in Macao’s economy. In 2019, the exhibition and creative culture industries, which the local government actively promoted, made up less than 1 percent of overall GDP. 　

“Lack of talent and limited land resources have led to the slow development of nongaming industries in Macao,” Ye Guiping said. 　

A State plan to deepen cooperation between Guangdong Province and Macao is a way out. In the policy address for the fiscal year 2020, Ho Lat-seng described a project with Hengqin District in nearby Zhuhai as the first step for Macao to integrate into the Guangdong-Hong Kong-Macao Greater Bay Area and a new space for Macao to diversify its economy. 　

This point is confirmed in the central government’s general plan released in September for building the cooperation zone, which designates Hengqin as a new platform for Macao to diversify its economy and a new working and living space for Macao residents. 　

According to the plan, Guangdong and Macao will jointly oversee operations of the Hengqin District zone and build a management committee to oversee international promotion, attracting investment, introducing industries and land development. 　

Lin Jiang said that Hengqin District is exploring an innovative model of regional governance. While much about the model remains unknown, one thing for sure is gaming will not enter Hengqin, Lin said. Guangdong and Macao will seek to develop non-gaming industries in Hengqin, including scientific research, high-end manufacturing, exhibition and cultural industries, finance and traditional Chinese medicine. 　

Experts anticipate Macao’s gaming industry will be restricted to an appropriate scale. The golden days of gaming’s absolute dominance are gone, Lin said. As for the size, Chen Zhangxi said that about 30 percent of Macao’s GDP will be more appropriate for the gaming industry. 

　

In the future, Macao needs to carefully balance gaming and non-gaming industries. Shi Jialun warned that because Macao has a weak industrial foundation, it needs some time for a diverse economy to grow. “Therefore, while restricting the growth of gaming and encouraging gaming companies to develop non-gaming businesses in the coming rebid, it’s also important to guarantee the stability and predictability of investment policies to ensure local employment and tax, which will set the foundation for developing multiple industries,” Shi said.