By Kate O'Keeffe And Ned Levin
MACAU--After more than a decade of stunning growth that made it
by far the world's biggest casino market, Macau is under siege from
China's corruption crackdown and a breakdown in its cash-spinning
junket system.
The Macau government reported Wednesday that gambling revenue
fell 39% in March from a year earlier to 21.49 billion Macau
patacas ($2.69 billion) following a 49% decline in February. It was
the 10th straight monthly decline. Analysts estimate that revenue
is on track to fall more than $12 billion--or about the size of two
Las Vegas Strips--this year from its $45 billion peak in 2013.
The spectacular decline follows Macau's equally spectacular
growth. In the 1990s, Macau was a backwater run by the Portuguese,
peppered with no-frills casinos, old churches and pastel-colored
government buildings.
Since returning to Chinese rule in 1999, Macau has become the
world's gambling capital, with 35 casinos crammed into about 30
square kilometers (11.5 square miles). And more than $20 billion
worth of lavish new projects are under construction.
The builder of one of the most luxurious hotels, a Hong
Kong-listed company named Louis XIII Holdings Ltd., in September
said it would pay $20 million for a 30-car fleet of bespoke
Rolls-Royce Phantoms, calling it the biggest order in the car
company's history.
Macau's juggernaut came to a halt last year as Beijing
intensified its crackdown on corruption. At the same time, China
tightened its grip on Macau, which is governed by the same one
country, two systems arrangement as Hong Kong. A liquidity squeeze
on the junket operators that finance the city's high-rollers
further hit Macau's lucrative VIP business.
Since Macau first reported falling gambling revenue on July 1,
share prices for local casino operators including the Hong
Kong-listed units of Las Vegas Sands Corp., Wynn Resorts Ltd. and
MGM Resorts International have fallen an average of 43%. CLSA
analyst Aaron Fischer issued a report last month titled "Death
Spiral" in which he slashed his forecasts for some operators' net
profits for the year by nearly 40%.
"During the gold rush, everyone continuously underestimated
Macau's growth and now it seems like we continue to underestimate
its rapid decline," Mr. Fischer said.
The corruption crackdown initially spurred dramatic growth in
Macau because VIP players rushed to get money out of China while
they still could, according to Ben Lee, managing partner at
Macau-based consultancy IGamiX. Revenue hit a record in February
2014 when Macau brought in 75% of the Las Vegas Strip's annual
gambling revenue in just one month.
The high-rollers were funded by junkets, which act like
financial intermediaries between casinos and big-spending gamblers
from China. Junkets bring high-rollers to casinos, lend them money
and then collect debts back home.
The junkets' "aggressive credit strategies" ended with the
disappearance of a Macau junket figure believed to owe up to 10
billion Hong Kong dollars ($1.3 billion), Mr. Lee said. The
incident broke the trust-based lending system, scared off junket
investors and sent revenue spiraling down, he added.
In June, a little over a month after the man vanished, revenue
in Macau fell for the first time in five years and has been on a
losing streak ever since. While lower-budget gamblers are still
pouring into Macau, a casino could need more than 12 of them to
make up for the loss of just one VIP, according to Mr. Fischer.
Beijing has always had great influence over Macau, but China's
leaders have never publicly singled the city out as a target of the
corruption crackdown, restricting their comments to suggestions
that the territory diversify its economy. The mainland had, until
recently, relied on local elites to manage daily affairs.
But Beijing's rhetoric hardened late last year as Macau observed
the 15th anniversary of its return to China from Portugal. Li Fei,
a top Chinese official in charge of Hong Kong and Macau affairs,
warned Macau officials in a December speech: "The inherent negative
elements of this gaming economy have affected social stability and
security in Macau and even mainland China."
Later that month when Chinese president Xi Jinping visited Macau
to mark the handover anniversary, he repeated the suggestion that
Macau diversify its economy away from gambling, but added that an
overreliance on the industry had caused "deep-seated problems."
"In the mainland, people believe that if you're going to Macau
it's definitely to gamble," said Kwok Chi Chung, president of a
junket trade group. "It's become a sensitive city."
Policy watchers say Beijing is now taking a much firmer hand in
managing Macau. In December as Macau Chief Executive Fernando Chui
embarked on his second five-year term, he replaced nearly every
senior official in his government in the most extensive political
shake-up since China took Macau back. Some of the new officials are
seen as significantly more pro-Beijing than their predecessors.
At the same time, the Liaison Office, China's representative in
Macau, is scheduling more meetings with Macau officials and
citizens and commenting more on policy matters in the media, said
Éric Sautedé, a political commentator. "I think they were just fed
up with seeing the situation get worse," he said.
There have been concrete policy changes too. Beijing has been
tightening visa rules for mainland Chinese visitors to Macau and
increasing oversight of the UnionPay debit cards many gamblers use
to access funds in the territory. In November, Macau's
quasi-central bank said it was working with China's Ministry of
Public Security to help prevent Macau from being used for money
laundering and capital flight.
This week, the deputy chief of China's Central Commission for
Discipline Inspection urged Macau's top anticorruption official to
help the mainland track down any fugitives fleeing the antigraft
crusade, according to an account of their meeting posted on the
commission's website.
"Everything that occurs in Macau with regard to gaming is
basically 'permitted to happen' by Beijing," said Steve Vickers,
chief executive of SVA, a political and corporate risk consultancy.
"This started with Beijing's tacit acquiescence to the violation of
its currency restrictions, which is the primary reason that Macau
has prospered as a gaming hub," he said.
Looking the other way and allowing casinos to rake in billions
gave China "a much needed channel to bleed off excess liquidity"
from its recently booming economy, said Mr. Vickers. But now, as
China's economy sputters, leaders are rethinking things--a course
of action that "will have a direct and severe impact on gaming in
Macau," he said.
Some companies appear to be trying to convince high-rollers to
try their luck at far smaller gambling hubs in Southeast Asia,
South Korea and Australia where growth has picked up. Near China's
Liaison Office in Macau, the city's largest junket operator erected
a billboard advertising business opportunities--in the
Philippines.
Write to Kate O'Keeffe at kathryn.okeeffe@wsj.com and Ned Levin
at ned.levin@wsj.com
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