China's twist on casino capitalism

China's twist on casino capitalism
05:55 AM Feb 07, 2011
by David Pilling
It is just 10 times the size of New York's Central Park with a population of 450,000. Its economy has been growing at twice the speed of China's for several years. Its nominal gross domestic product per capita is roughly US$40,000 ($50,983), about the same as Germany and higher than the United Kingdom.

Place your bets: The city in question is Macau.
Macau is China's gambling capital, the only place in a gambling-crazy country of 1.3 billion people where it is legal to bet in a casino. It is an officially sanctioned safety valve. China's frustrated gamblers are corralled into a tiny peninsula, where they spend an average 1.4 days losing bucket-loads of money, principally on baccarat.
Last year, they left about US$23 billion on the table (of which Macau's government takes a 40 per cent cut) some four times the amount Americans donated to the casinos of Las Vegas.
Macau has been in the news because of the extraordinary saga of Mr Stanley Ho, the 89-year-old billionaire who made his fortune from a 40-year gambling monopoly granted by Macau's Portuguese colonisers. Mr Ho is in the midst of an unseemly tussle for his estimated US$3.1 billion fortune.
Competing factions from at least 16 children Mr Ho has fathered with four "wives" are battling for a share of his wealth with all the venom one normally expects after a patriarch's funeral. Mr Ho is condemned to watch the spectacle while he is still alive. It is enough to give polygamy a bad name.
But the fun and games surrounding Mr Ho's charming family are but a sideshow to the goings-on in Macau itself. The Portuguese established Macau as a trading post in 1557, some 300 years before Hong Kong became a British colony. Hong Kong's rise as a financial centre left Macau to specialise in vice: Gambling, prostitution and loan-sharking. In the run-up to the 1999 handover to China, Macau remained a seedy place, with street shoot-outs between triad gangs a regular spectacle.
Beijing took a strategic decision to clean up Macau. It would also develop it into Asia's premier gambling destination. Just as Hong Kong is China's banking centre, so Macau would become its baccarat hub. Both special administrative regions would show Taiwan it was possible to be part of China and free to do one's own thing.
Almost instantly, Macau's violence ended. So, too, in 2002 did Mr Ho's monopoly. Two of the new licences went to the kings of Nevada, Mr Sheldon Adelson and Mr Steve Wynn.
When, in 2004, Mr Adelson opened the Sands Macao, there was a stampede to get in. The casino, the first to cater to mass-market Chinese gamblers, paid for itself in eight months. Mr Adelson later added the 3,000-room Venetian Macao hotel and convention centre, the world's largest casino and one of the few places where you can take an indoor gondola ride. Mr Wynn added a higher-end, more discreet casino that proved equally popular.
Macau derives four-fifths of its revenue from gambling (compared with less than half in Las Vegas), the bulk of it from high-rollers. Officially, Chinese citizens are allowed to exchange about US$50,000 a year into hard currency. But many high-rollers spend much more than that. They can do so thanks to the so-called junket operators who provide gamblers' hard-currency stake in return for yuan-denominated collateral. If the gambler wins, he keeps his hard-currency earnings. If he loses, he pays back in yuan.
Because such loans are not exactly official and unenforceable in China's court system, they are collected the old-fashioned way. Analysts covering Macau insist that the bulk of money wagered - estimated by CLSA at US$750 billion last year - is legitimate gambling.
But the opportunity for money-laundering is also obvious. Of the debts settled by junket operators, CLSA writes reassuringly: "Note that the numbers of reported assaults or deaths associated with debt collection are surprisingly low."
Beijing may well be hoping that foreign operators can further nudge Macao in the direction of convention business and mass-market gambling. That would make it far less dependent on the volatile and potentially shady world of the high-rollers.
In the meantime, the former Portuguese colony is riding wave upon wave of money. Last year, its cash-flush government made a "wealth-sharing handout" of US$750 to every Macanese. So long as its monopoly lasts, the exact source of gambling revenue may not matter too much. The dice are loaded in Macau's favour.


David Pilling is the Asia editor of the Financial Times.
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