China's Big Gamble
押注在中国

By January 2009, Macau’s gaming revenue had fallen 30 percent from the previous year.

Desmond Lam, Visiting Senior Research Fellow at the University of South Australia, explained that the central government has several motives for the new restrictions.

“Around 55 percent of visitors to Macau came from mainland China in 2007 and around 30 percent from Hong Kong,” said Lam, who formerly taught as an assistant professor of Marketing at the University of Macau. “Most importantly, the restrictions send a message that China is watching the explosive but unregulated, probably unsustainable, development of Macau's gaming industry.”

Some observers are optimistic, though, that visa regulations may be eased in the coming months. The Hong Kong Economic Times recently reported on future plans for one-year, multi-entry visas for the 95 million residents of China’s southern Guangdong province.

Yet as global markets suffer and China’s public feels the aftermath, the government is attempting to inhibit wasteful gambling among the country’s less wealthy. Lam noted that the government keeps a close watch on the potential of certain social problems creeping out of Macau.

“There are increasingly issues with problem gambling. Some Chinese officials and high-level executives in state-owned enterprises are secretly squandering away their money, some public funds, in Macau's casinos. Macau is seen to be exporting these problems to [neighboring] regions, especially to China and Hong Kong.”

Schwartz sees several other issues complicating business in Macau beyond back-and-forth political wrangling.

“On the one hand, you have an artificially restricted market because you only have the three licenses and three more subconcessions,” referring to the government’s issuance of gaming licenses to only a select few companies. “Steve Wynn doesn’t have to worry about Harrah’s opening up next to him.”

In 2007, Harrah’s Entertainment purchased the Macau Orient golf course inside the Cotai area. Though Harrah’s is the largest casino operator in the world, the company is prohibited from establishing a casino in Macau without a concessionaire license. Harrah’s is banking on the possibility of the government opening up further licenses.

“On the other hand, though, since 2002, the SAR has been so bullish on gaming they’ve approved a lot of projects,” Schwartz said. “You have a huge amount of supply and potential supply that is going to really dilute the market, especially if the central government is really clamping down on visa restrictions.”

With thousands of rooms opening every few months, it is easy to see how supply may outweigh demand. Even today, construction on luxury hotels and resorts across the country has experienced no visible slowdown in the midst of a global economic downturn. The pre-Olympics fervor and its subsequent building boom have led to a glut of empty hotel rooms across China.

Yet early estimates may have not been so clear. Macau overtook Las Vegas as the world’s top gambling destination in 2006, when gross revenues for the peninsula topped US$6.8 billion, just above Vegas’ $6.6 billion. In 2007, Macau’s revenue reached $10.4 billion.

But has Macau truly supplanted Las Vegas as gaming top dog? While politics and project finances may already bring such a claim in to doubt, Macau’s tax rate will keep it below Vegas in the eyes of the world’s high rollers.

“The thing that works in Las Vegas’ favor is the tax rate,” said Schwartz. Nevada charges its gaming companies a 9 percent tax rate. Macau, on the other hand, tops the globe with a 39 percent rate, giving Vegas a comparative advantage on the biggest spenders. “If you have a really high roller that is going to drop a couple million over a year, getting them on a jet out to Vegas, [casinos] are going to see a lot more money out of that…[if not,] you are giving money away to the Macau government.”

For the daytripper from Guangdong, Macau will remain the top gambling destination. The average gamer’s spending is but a minor note in the casino operator’s tax considerations. Yet when it comes to “whales,” the gambling world’s biggest spenders, these companies will opt to fly their clientele to Las Vegas for the tax benefits. While it may seem obvious that Macau should lower its rates to take advantage of these high rollers and their frivolous spending, often dropping millions of dollars at a time, the local government sees enormous benefits from the higher-than-usual tax revenue.

“It works very well for Macau,” Schwartz said. “They can have a 40 percent tax rate and still get a lot of development.  How much more product could they add if they lowered the tax rates?”

Eadington put the situation into a larger context of Macau’s overall development strategy, both in Beijing’s eyes and from the perspective of the local government.

“Keep in mind what’s happened in Macau over the past five years,” Eadington said. “They’ve had a lot of labor issues and social pressures because of the very rapid growth and importation of labor, and construction for example. This is going to slow down, have a much greater impact on [mainland] Chinese labor rather than Macau’s [local labor force]…Much of the construction labor is imported [and] works on a contractual basis.”

With the intense economic slowdown, the casinos have been forced to lay off thousands of employees and construction workers. The current phase of Adelson’s grand plan, a four-hotel development, sent 11,000 construction workers home in late 2008, most from the mainland.

“There may also be a political dimension to this as well,” said Eadington. “With that kind of a dramatic layoff, it may be a bit of posturing on behalf of the company to gain certain political concessions.”

In late 2008, the Singapore government announced that it would intervene, if necessary, to ensure the success of its casino resort projects. The city-state, which legalized gambling in 2006, is home to another US$4 billion project from Adelson’s Las Vegas Sands set to open in late 2009.

The Macau government quickly echoed Singapore’s guarantees and assured investors that it would take over any bankrupt projects, said Eadington.

Macau has hit a rough patch. It remains to be seen whether the risky bets there will weather the storm and emerge as the gambling paradise so many envisioned just a year ago.

Desmond Lam sees potential in Macau’s future.

“Chinese do love to gamble, in good times or bad. The present emphasis on gaming rather than non-gaming will probably see Macau bound back from this global crisis much faster than other countries. This is a blessing in disguise for Macau.”

Yet Macau’s early hardcore gaming appearance is being transformed by the emergence of Las Vegas companies. The era of dimly lit and cramped casinos is being rapidly replaced by the shiny lights and nonstop entertainment of Las Vegas-style glitz and glamour. And while similar scenes are popping up throughout China in places like Shenzhen and Hainan, Macau will remain the key destination for the country’s millions of gamblers.

“I think in the long run, it’s hard not to be bullish on the Chinese gambling market,” Schwartz said. “Just look at the demographics, you have more wealth, and a culture with a propensity towards gambling. If you look at the big per capita gambling markets, China is right up there with Australia and the U.S.”


Peter Winter is deputy editor of US-China Today. He is a graduate student in Public Diplomacy at the University of Southern California.