By Kate O'Keeffe 

The future of the world's casino capital depends on Beijing--a fact that, if ever in doubt, was made clear in 2014 as China's antigraft crusade dealt Macau its first recorded decline in gambling revenue.

Last year gambling revenue in the Chinese city fell 2.6% to 351.5 billion patacas (US$44 billion) from 2013, government data showed Friday. It was the first calendar-year revenue decline since 2002, which is as far back as public data go. December gambling revenue plunged a record 30% to 23.29 billion patacas (US$2.92 billion) compared with the same period in 2013, extending a seven-month losing streak in the casino hub, the data showed.

The recent poor performance pummeled casino stocks. Shares of Macau's six licensed casino operators fell an average 40% in 2014. Las Vegas Sands Corp. unit Sands China Ltd. (1928.HK) and Galaxy Entertainment Group Ltd. (0027.HK)--the only two that are part of Hong Kong's blue chip Hang Seng Index--were two of the three worst-performing stocks on the index last year, weighing down the entire market. Galaxy shares dropped 37%, and Sands China shares fell 40% compared with the HSI's 0.4% rise over the year.

By contrast, in 2013 when Macau gambling revenue rose 19%, the share prices of Nasdaq-listed Melco Crown Entertainment Ltd. as well as Hong Kong-listed MGM China Holdings Ltd. and Galaxy all more than doubled.

The sharp reversal in the fortunes of Macau, which in 2013 raked in seven times the gambling revenue of the Las Vegas Strip and which had for some time been growing by the size of the Strip each year, took many executives, analysts and investors by surprise.

The primary cause of the sudden downturn is a China-wide crackdown on corruption, they say. In addition to bringing down many top mainland officials, the sweeping campaign has led highrollers to shy away from Macau's baccarat tables, they say. Other government policies introduced this year that have negatively impacted Macau include tighter visa policies for Chinese traveling to Macau and increased oversight on the UnionPay cards many gamblers use to access funds there, they add. Many say they have no idea when things will improve though they do believe the city will right itself in the long-term.

Wynn Resorts Ltd. chief executive Steve Wynn, who has long extolled the virtues of what he deemed predictable government policies in China, said on an October earnings call that the antigraft campaign had "put a lot of the wealthy businessmen in the foxholes" and that he didn't know how long the policies would affect Macau. "I don't know whether it is a squall or we are in the rainy season or how long it will last, but we are still very, very bullish on Macau," he told listeners on the call.

Alongside the corruption crackdown, Beijing has also been intensifying its calls for Macau to diversify its economy away from gambling, which accounted for more than 80% of the government's revenue in 2013, according to official data. Chinese President Xi Jinping reiterated the message during a rare visit to the former Portuguese colony last month for the 15th anniversary of its return to China.

A once desolate Chinese island called Hengqin is the linchpin of the plan, according to a Macau government adviser. China wants land-strapped Macau to use its riches from gambling to develop non-gambling ventures on the island, the person said. Hengqin is three times the size of Macau and located at the crossroads of that city, Guangdong and Hong Kong.

But China has thus far been frustrated with the slow pace of development on Hengqin and complained that many Macau investors in the island are just sitting on the land as investments with no plans to actually develop soon, said an executive involved in discussions about Hengqin. Now, however, China is no longer just suggesting Macau work seriously to develop the island, said the Macau government adviser. The call has become "an order."

Macau casino operators including Galaxy and MGM China have said they plan to invest in nongambling projects in the area. Casino companies can also participate in the diversification plan by offering more non-gambling activities at their casino-resorts, said Ambrose So, chief executive of SJM Holdings Ltd., Macau's oldest casino operator. "Integrated resorts offer a diverse mix of activities for patrons--including lodging, dining, shopping, entertainment" and meetings and convention facilities, he told The Wall Street Journal in reply to an emailed request for comment. "This requires hiring and training local employees with a diverse set of skills," he said.

While China's policies have hurt casino investors, many in Macau actually welcome the fresh direction, said Éric Sautedé, a political commentator and part-time professor at three universities in Macau. While Macau has had great success in developing casinos, infrastructure including public transport, housing and health care remain woefully underdeveloped. "I don't think people see the central government as a threat. They see it much more as the last resort for things to change," he said.

Mia Lamar contributed to this article

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