Published: May 11, 2022

Macao bets on a new future as China cracks down on gambling

HONG KONG -- Glitzy gaming resorts that line the Cotai Strip in Macao were once bustling with tourists and high rollers looking for a seat at the table. However, coronavirus restrictions for the past two years have all but stopped visitors from coming into the city, leaving the strip -- and the rest of Macao -- eerily quiet. Despite the lull, gaming companies have not been sitting still.

A $2.2 billion makeover of the dated Sands Cotai Central has resulted in a replica of London's Big Ben tower and Houses of Parliament, expanded retail options and celebrity chef restaurants.

The latest rebranding of The Londoner Macao, a British-themed integrated resort complex launched in February 2021, was the "best thing we've ever done in my opinion," Rob Goldstein, CEO of Las Vegas Sands told investors eager to learn more about the future of the gaming hub in October. The Londoner features London-inspired restaurants - including an upscale pub led by Michelin-star chef Gordon Ramsay -- a 6,000-seat multipurpose arena and over 150 stores.

The Shaftesbury Memorial Fountain sits in the Londoner's lobby, and iconic red phone booths are scattered throughout replicas of London's shopping streets. The mega resort also puts on a six-minute show of the Changing Of The Guard at Buckingham Palace and offers a virtual ride through London with a holographic David Beckham grinning away in the front seat of a black cab, in a bid to lure tourists who do not necessarily want to gamble. Gaming floor space shrunk by 4.3% after the rebrand, giving way to more retailers.

The emphasis on entertainment and nongaming attractions by Sands China, a subsidiary of the U.S.-based casino company, and five other gaming operators over the years, highlights the broader concern by operators over amendments to the gaming law -- under pressure by the Chinese government -- that will further regulate the industry. It also comes as operating rights expire at the end of this year.

Macao, a Portuguese trading colony that goes back to 1557, became known for gambling after the Portuguese government legalized the activity in 1849 to generate revenue for the city. The sleepy backwater attracted residents from southern China and Hong Kong with its gaming houses and licensed brothels, and continued to flourish embracing the glitz of gambling even after its return to China in 1999.

The only place on Chinese soil where casinos are legal, thanks to the freedoms under the "one country two systems" principle, Macao became a destination for millions of visitors and Chinese high rollers, and in 2013 the small territory leapfrogged Las Vegas in gaming revenue to become the world's richest gaming hub.

Now, however, Beijing has become concerned about money laundering and capital flight, and the city is seeking to tone down its decadent reputation and rein in an industry that was a pillar of its success.

"Beijing will clean the whole casino industry," says Sonny Lo, author of "Casino Capitalism, Society and Politics in China's Macao."

"Casino capitalism can continue, but it must be conducted in a clean manner, it can continue on the condition that Macao must diversify its economy."

The proposed changes to the gaming law, which were unveiled at the beginning of the year, mark the biggest shake-up to the world's largest gambling hub by revenue in two decades. Gaming licenses will remain at six, but operating rights will be halved to 10 years. Much to the concessionaires' relief, authorities ruled out an earlier proposal for a government official to directly supervise the casinos' day-to-day operations. But the initial 44-page draft bill, introduced in January this year, made clear the industry will be under tighter scrutiny.

The six gaming concessionaires, including Sands China, Wynn Macau and MGM China Holdings, have greeted the draft law with warmth, but underneath this veil of gratitude investors and gaming executives have been anxiously waiting for the final bill to emerge.

"The devil is in the details," one gaming executive, who spoke on the condition of anonymity, told Nikkei Asia. "Everybody is waiting for some clarity, until then we're all apprehensive."

Running out of luck

Gaming tourism got its breakthrough in the 1960s when the late Stanley Ho, known to many as the godfather of gambling, secured monopoly rights to run casinos. He introduced Western-style games, spearheaded the VIP junket system, and modernized transport between Macao and Hong Kong, transforming seedy gambling dens into glittering modern casinos. His empire includes the iconic Grand Lisboa, a lotus flower-shaped casino covered in a colorful neonlike display.

As China's economy grew, so did the wealth of Macao. The government liberalized the casino market, ending Ho's four-decade monopoly in 2002. Ho's gambling company SJM Holdings won operating rights alongside five others. It only took Macao a few years to overtake the Las Vegas Strip as the world's biggest gambling hub with gaming revenue peaking in 2013 at $44.69 billion. But the reputation of the city suffered - epitomised in the James Bond film Skyfall (2012) when a scene took place in a fictional Macao casino, complete with a torchlit fight to the death in a pit of man-eating Komodo dragons. 

In 2019, Macao's 41 casinos raked in $36 billion in gaming revenue, while the Vegas strip, with its 144 casinos, recorded $6 billion. Before the pandemic the enclave was welcoming an average of 2 million visitors a month. But Beijing's distaste for vice and a crackdown on corruption has put pressure on the city to reduce its reliance on gaming.

Now the coronavirus is revealing cracks in the economy, which experienced the world's worst contraction (-56%) after gamblers stopped showing up in 2020.

China has repeatedly warned that capital outflows and illegal gambling are a threat to its economic security and social stability as gambling funds of over 1 trillion Chinese yuan ($149.35 billion) leave the country each year, according to Liao Jinrong, a senior public security official, in 2020. Beijing already limits annual foreign currency purchases to the equivalent of $50,000 per person.

Chinese President Xi Jinping even urged Macao to focus on "appropriately diversifying its economy" during a speech on the 20th anniversary of its return to Chinese rule.

And so Macao listened. When the gaming draft bill was introduced to the territory's legislature in January, Lei Wai Nong, secretary for the economy and finance, stressed that development and promotion of nongaming elements would play a significant role in the re-tendering process. Gaming license renewals for the six operators are not guaranteed.

Before 2016, Lei told lawmakers, gaming was the No. 1 reason visitors came to Macao. "However," Lei went on, "it changed to nongaming elements such as shopping and accommodations after 2016. Thus, nongaming elements of the future will be enhanced, enriched and diversified based on the social and market accumulation of the previous 20 years."

The proposals are seen by many in the industry as a government push to extend its oversight of the world's richest gaming hub and tighten its control over the gaming sector. Government officials, meanwhile, say reforms are necessary to stabilize the city for "healthy development."

Among the revisions, safeguarding national security was inserted in the gaming law without offering a clear definition of what would be considered threatening to "national security or the security of Macao." A license could be terminated by the city's chief executive with the Gaming Committee's approval. There would be no review, though the concessionaire could appeal the decision. The insertion's placement as the first article highlights its priority for concessionaires, lawyers say.

Legal observers and lawyers have noted that the provision could be used indiscriminately. This, the legal observers say, underscores that nothing will deflect Beijing's determination to reduce the gaming industry's influence.

Junket operators, whose business operations have helped the city flourish by bringing in nearly 40% of its gaming revenue, have been in the crosshairs. Despite being previously targeted, they faced a renewed crackdown last year.

Cracking down

For more than 15 years, Alvin Chau, one of Macao's most influential characters, spearheaded an industry that ferried mainland Chinese gamblers to Macao's casinos. The junket operators offered lavish travel packages and credit, settling debts through murky unofficial channels.

Through his Suncity Group Holdings junket empire, which employed more than 4,500 agents and staff, Chau opened VIP rooms where bets sometimes started at 100,000 Hong Kong dollars ($12,739), in the casinos of the six operators.

Described by his closest aides as "charming" and "creative," Chau put millions back into Macao's entertainment sector, sponsoring the Macao Grand Prix, the city's biggest annual sporting event. He even became a political adviser in Guangdong Province, strengthening ties between the gambling hub and mainland China.

Despite courting Beijing, the junket emperor was apprehended in December over allegations of money laundering and organizing illicit gambling operations.

Forced to close all of its VIP rooms, Suncity Group filed for dissolution. About a month later, Chan Weng Lin, another junket princeling and the chairman of Tak Chun Group, Macao's second largest junket operator, was slapped with similar charges.

The arrests served as warnings, but authorities still felt the need to ensure complete obedience. Proposals to the gaming law and a separate bill targeting the sector have "castrated" the industry, one former junket agent said.

The draft rules would limit each junket service to working with only one casino operator. Operating dedicated VIP rooms would be banned, as would taking a share of gambling revenue. Junket services would also have to acquiesce to government reviews, which would effectively evaporate their income streams and restrict how they move capital. Junket services would only exist in name, the former executive said.

Macao's gaming regulator in January approved 46 junket licenses, just over half the number issued a year earlier, but since then many household names including Tak Chun Group, Meg-Star International and Macau Golden Group have ceased operating, according to industry insiders. Laid-off workers say they have little in the way of transferable skills and are often turned away by hiring managers.

"The government doesn't really care about the industry and the people who work there," said a former junket agent who worked at Suncity for more than a dozen years. "Once the gambling law [amendment] was introduced, it was over for us."

Thousands of people have lost their jobs as a result of the junket crackdown. The unemployment rate in the city of nearly 650,000, which for the past decade had been well below 2%, reached 4.6% for the three months ending in March, the highest reading since 2009.

"It is very regrettable that [the government] suddenly does not recognize Macao's enterprises, the development directed by the people of Macao," David Chow, founder of Macau Legend and a former legislator, told the media after a meeting with the government. "I support the healthy development of the gaming industry, but not this healthy closure of the industry."

Goodbye to gaming?

Opposition against the bill is not absolute. Some investors are receptive to diversifying Macao's economy and are willing to give other industries a chance to flourish. But many worry that rapid changes to the market could cause cascading effects and create instability as the rich-poor divide widens.

Even the International Monetary Fund has an opinion. In April it warned of Macao's overreliance on the gaming industry.

January's draft proposal, coupled with a hostile environment, is expected to reduce VIP gaming revenue by 90% compared to pre-pandemic levels. But according to a note by Bernstein's Vitaly Umansky, the changes are "beneficial to the industry long term ... with more stable and less 'shady' gaming revenue."

As casinos shift their focus to the mass market, diversification will naturally follow, former gaming executives and analysts say. Nongaming investments would be further propelled, and the weight of the gaming industry would decrease.

The Chinese Communist Party's ban on gambling on the mainland has historically spurred gamblers to flock to the only city on Chinese soil where it is safe to engage in the pursuit.

But surveys of mainland tourists, who accounted for 90% of Macao's 39 million arrivals in pre-pandemic 2019, have been showing a change in tastes since 2005, with visitors increasingly interested in nongaming attractions.

"Casino games are the same in every casino," said professor Wang Changbin, director of the Center for Gaming and Tourism Studies at Macao Polytechnic Institute. "It is a good factor for nongaming elements to be a stimulus to economic diversification."

Robbert van der Maas came to Macao 15 years ago to help manage MGM's nongaming services. At the time, a myriad of family-owned businesses, cafes and restaurants made the city special, but the casinos offered generous salaries.

"In a short period of time, everything disappeared, also because rents went sky high," said van der Maas, who now runs the APAC Hospitality Services Macao consultancy.

Since liberalization, Macao has tried, in entertainment terms, to attract tourists who do not want to play the tables, giving them concerts featuring Celine Dion, Bruno Mars and Mariah Carey.

Casino companies have invested billions in building colossal halls in a bid to lure MICE tourists -- those who travel for meetings, because of incentives offered by their employer, or for conferences or exhibitions. Galaxy Entertainment Group opened a 40,000-sq.-meter MICE venue last year.

The city has improved its retail and gastronomy experiences, though mostly in the casino resorts.

"There's no argument from the operators as well that diversification is good for the business," said Kevin Clayton, former chief marketing officer at Galaxy Entertainment and executive vice president in marketing operations at Sands China. "It's not short of world-class facilities. What it needs is more headline-making content that grabs the attention of mass audiences throughout Asia."

Challenges ahead

Another obstacle the enclave faces is a lack of land. To solve this, Beijing in September earmarked Hengqin, a large island roughly three times the size of Macao, as a special zone to help its neighbor diversify and expand nongaming industries.

The island, already a tourist destination as it holds the Chimelong Ocean Kingdom amusement park, would be leased to and administered by Macao. However, mainland law would be applied by both the Macao and Guangdong provincial governments.

Macao and Hengqin only recently set up a management committee to develop a legal framework, with a target for the Hengqin-Guangdong-Macao cooperation zone to be completed in 2030.

Plans to foster new industries, however, are already in place. The Hengqin Port checkpoint has been built, providing easy connectivity between Macao and Guangdong, and the Economic Development Bureau of the cooperation zone has held several meetings with investors.

Galaxy Entertainment is planning to build a resort on a parcel in Hengqin, and Sands China has spoken in favor of investing in projects on the island. Some investors remain cautious and have expressed hesitation due to questionable returns, but observers say gaming companies may have no choice as they could end up at the mercy of the Macao government.

China's gifting of Hengqin to Macao is seen as the cure to a "stubborn disease" that has stifled the enclave's development. Chinese state-backed think tanks, such as the Macao Innovation Development Research Association, believe "integrated development needs to be strengthened." This is understood by many to refer to Macao's absorption into the Greater Bay Area, a megalopolis of 11 cities including Hong Kong and Macao, rather than to an expansion of the city itself.

"To go one step further," author and political commentator Lo said, "it's actually a socioeconomic scientific integration; it's an economic integration of Hong Kong, Macao, Shenzhen and Zhuhai. It's all part of the Greater Bay Area plan.

"Macao's identity will become more mainland Chinese."

Lo was suggesting that Macao may lose some of its Eurasian blend of cultures, which up until now has offered a contrast to the mainland.

Joining forces with Hengqin and the GBA would allow Macao, with its tiny population, to access a larger pool of skilled labor. "It has become difficult for talent to flow in, especially with the rapid progress in China," said Jay Chun, of Paradise Entertainment, a company that provides electronic gaming equipment and systems to casinos. "Many talent are basically reluctant to come to Macao.

"The diversification of Macao's industries, I think, is a long-term process, not to say that it can be done overnight."

Van der Maas says Macao needs to continually reinvent itself to remain a relevant market, and changes to the gaming industry and the diversification of the economy could provide a surge of opportunities for the local population.

"It's a very unbalanced economy," he said. "Six, seven, eight years ago all these big casino operations opened up and lots of young people left school and went to work as dealers ... [and suddenly they] were already making more money than their parents."

The industry took a massive blow in September after a government consultation document suggested a government representative supervise daily casino operations. As a result, global casino stocks dived, losing $14 billion in value.

Casino operators, particularly U.S.-owned concessionaires, breathed a sigh of relief when the current proposals did not include the aforementioned suggestions. The new rules have increased the share capital of the managing director, who is required to be a Macao permanent ID holder, to 15% from 10%.

With mainland China determined to stop capital flight, and U.S.-China tensions fraught, American companies could fare worse than their local counterparts, especially if the Macao government shows favor to domestic gaming companies.

Lo, the author and political commentator, says it would be in the interest for foreign casino companies to have local partners.

"The local partners' presence is important," he said, "because it gives an image and substantial confidence to the central authorities in Beijing that the profits stemming from such joint venture casinos would not flow out of Macao into other foreign places."

Macao remains crucial to U.S. gaming companies' business strategies. Las Vegas Sands has agreed to sell its Las Vegas property and operations to focus on the Chinese market, while Wynn and MGM have reaffirmed their long-term commitment to the city.

Also being discussed among members of Macao's legislature is the expanded definition of casino facilities during the reversion process -- when a concessionaire's license lapses and its casinos, including gaming equipment and floor space, reverts to government ownership.

Those who win a new license and wish to continue to operate when rights end on Dec. 31 would have to pay the government.

"The government is not doing the best they could, in my very humble opinion, to prove to investors that they are aware of the dire situation of the gaming industry," said gaming lawyer Carlos Lobo.

Casino operators have been hemorrhaging money during the past two years as COVID-19 restrictions have shut out tourists and gamblers. Concessionaires paid roughly $5.83 million to extend their licenses from their scheduled June 26 expirations to the end of the year.

In April, Macao Chief Executive Ho Iat-seng told lawmakers that the casino industry was facing one of its lowest points. Ho added that the draft law would provide the city an opportunity to alleviate the sector's problems and pave the way for healthier development.

"We have realized the original law was not executed thoroughly enough," he told the lawmakers. "We hope we can do better with these amendments. Presently, we are at the lowest point of the gaming industry."

Although the gaming industry's influence is set to wane, operators are still willing to bear the skyrocketing costs to have a seat at the table. The new concessionaires, though, will be operating in a very different Macao.

The amended law "changes two things," said Ben Lee, managing partner at gaming consultant IGamiX. "It changes the return on investment landscape, it's no longer unfettered profitability, and it will force the new concessionaires to be smarter in the way they operate."

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