Question of the Day - 05 July 2023

A lot of things.

When China opened Macau to international casino operators in 2003, it didn't reckon, apparently, on how big it would get. By 2006, it had already rocketed to a $7 billion-per-year market, even as some of the major casinos were still under development.

The Chinese government frowns on conspicuous consumption and high-net-worth individuals (high rollers to us, VIPs in Macanese nomenclature) were spending the farm on gambling junkets to Macau. What’s more, although the central government had set strict limits on how much capital could be taken out of China, VIPs were skillful at circumventing the restrictions. They also had the cooperation of junket operators, who were allowed to extend credit to mainland players; casinos in Macau aren't permitted to issue markers.

To battle this, Beijing launched a series of countermeasures, culminating with a crackdown on junket operators during COVID. After a handful were prosecuted and sentenced to long prison terms, the junket operators basically dried up — and credit with them. Today, the industry is a fraction of what it was 15 years ago. 

A second constraint is that U.S. casino operators blithely assumed that, after a first wave of six casino concessions, more would follow. But the Chinese government took a wait-and-see attitude. After watching the monster (from their perspective) they'd created, it was clear that six concessions and no more would be forthcoming.

Also, there’s only so much land in Macau, a narrow peninsula off the mainland province of Guangdong, with two islands connected by land reclaimed from the sea, an area known as Cotai. What’s more, all of it was being consumed by casino projects and the Macanese government wanted some of it returned. After clawing some casino acreage back from Sheldon Adelson, City Hall made it amply clear that the days of unfettered gaming in Macau were numbered. Affordable housing for workers and economic diversification were becoming priorities.

The perils of a one-dimensional Macau economy were made amply clear by the pandemic, which laid waste to the region for the better part of three years. Casino operators were good soldiers, keeping their workers on the payroll, but they lost a lot of money in so doing. The good news is that Macau is coming back faster than expected. The bad news is it still has a ways to go to regain its pre-pandemic altitude (it’s about two-thirds of the way there).

Finally, the Beijing government made it known who was boss during and after the pandemic with the way it handled the process of concession renewals. Economic diversification is now mandatory, even if casino-centric companies may be hard-pressed to supply it. Large sums must be set aside for non-gaming attractions and concession periods have been halved, from 20 years to 10, making those non-gaming investments harder to amortize. 

In short, we’ll never know just how big a casino market Macau could be or could've been, if only because the central government turns the economic forces up and down like the burners on a gas stove. It may be a bad bargain, but the casino industry went into China with its eyes open and no one is forcing them to operate in Macau.