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Killing The Ills

The Year of the Rat was a tough one, but Macau still forged ahead

Killing The Ills

On January 26, 2009, Chinese around the world bid farewell to the Year of the Rat and welcomed the new Year of the Ox. For the people, government and casino concessionaires of Macau, the Year of the Rat (2008) was a year of ups and downs.

For many, 2008 could be remembered as the year when the tide turned. It was a year to remember, when many mistakes were made and valuable lessons learned. There were moments for celebrations, especially at the beginning of the year. However, celebrations quickly turned to competition and casino profits dwindled. By the end of 2008, most people were deeply concerned with the impact of mainland China’s visa policies and the global economic crisis on Macau’s casino gaming industry.

The year 2008 started with SJM announcing the rebuilding of Macau’s landmark casino resort Hotel Lisboa, the oldest casino in Asia. It was a decision that reflected the intense competition that SJM was facing since the gaming industry liberalized in 2002-the slow reinvention that it badly needed to fend off the threat of the other casino concessionaires.

The beginning of 2008 saw a stream of good news spilled over from 2007-the spectacular rise in gross casino gaming revenue and visitor numbers from mainland China and the rest of the world (especially southeast Asia). In February, Ponte 16 opened on the Macau Peninsula. It was Macau’s 29th casino. At this time, a member of the Legislative Assembly predicted that Macau’s gaming revenue would exceed US$10 billion by the end of 2008, quite a safe bet considering the economic conditions in early 2008.

There were also talks that Macau would surpass Hong Kong as the region’s top tourist spot by the end of the year. In January 2008, the total number of guest rooms available in Macau was around 16,000. By March, government figures showed that a total of 23 hotel projects (approximately 24,000 guest rooms) were under construction.

Hotel occupancy rate averaged around 70 percent to 80 percent during this period, according to local media. Gambling taxes accounted for around 70 percent of Macau’s tax revenues, and casinos employed around 44,000 people in 2007.

Mainland Crackdown

Casino security was once again under public scrutiny, despite claims by a government agency that Macau’s casinos were among the most secure in the world. Media cited an estimated US$2.5 billion per year lost in casino gaming revenue due to side-betting as a reason Macau needed more than just the most advanced security and surveillance equipment in the world.

This scam involves gamblers and junket representatives illegally agreeing to multiply the value of their table chips bet without the knowledge of the casinos (and hence, government). There was a sense that the anti-money laundering law was inadequately enforced in Macau’s casinos. Casinos were required to report any transactions that were above MOP 500,000 to the Gaming Inspection and Co-ordination Bureau. However, these transactions were normally filed under the names of the junket representatives and VIP promoters. The real identities of the actual gamblers were to remain unknown (or protected) due to the special VIP structure that Macau has adopted for decades.

The result was that VIP customers-many were mainland Chinese and would include corrupted officials or criminals-enjoyed the privacy that they wanted. In the eyes of the Chinese central government, this current VIP structure/system might be a major obstacle for the sustainable growth of Macau’s casino gaming industry.

 In February, Xinhua News Agency reported the result of a string of gambling crackdowns conducted in 2007 throughout mainland China. Police said they uncovered hundreds of thousands of gambling cases, busted tens of thousands gambling rings, and arrested more than a million Chinese gamblers.

To fight gambling, a special committee headed by the Ministry of Public Security was established. This was a warning sign for Macau and the unknown number of mainland Chinese officials who squandered away public money gambling in Macau’s casinos. There was speculation that the Chinese central government would turn its attention to Macau once the Olympic Games were over.

There was a real concern that the government would start to crack down on gambling-related organized crime and corruption (i.e., the embezzlement or mismanagement of public funds). It was believed that corruption had reached a new high and gambling was partly to be blamed. The Individual Visitor Scheme (IVS) that was implemented in 2003 has brought benefits to Macau, but also has encouraged more crime, corruption and other social ills within mainland China.

Media reports on crimes relating to excessive gambling in Macau by mainland Chinese have climbed significantly since the liberalization of casino gaming. Some observers suggest that the number of cases might have more than doubled. More seriously, the amount of money involved was staggering, and its impact on ordinary people widespread.

For example, the Shanghai Morning Post reported a former postal bureau director in Foushan (Guangdong) was caught defrauding some RMB 1.79 billion (US$ 238 million) from 352 accounts in the postal savings bank to pay back hundreds of millions that she lost in Macau’s casinos.

In another case, the former board chairman of the Gas Administration Corporation of Haikou (Hainan) embezzled more than RMB 10 million (US$ 1.5 million) of public money for gambling. Between 2001 and 2007, he made approximately 120 gambling trips to Macau and Hong Kong.

From a statement released by a former Chinese official who was tried for the embezzlement of public funds for the purpose of gambling overseas: “Gambling is the source of all evils. It ruins my family.” These high-profile gambling-related corruption cases by Chinese officials were a cause of concern for ordinary Chinese, and must have caught the eye of the Chinese central government. Enough is enough!

VIP Play

The overemphasis on VIP game play and promotion had a big role in the subsequent development of Macau’s casino industry in 2008. Crown Macau, which engaged the Hong Kong-listed VIP junket operator (also called consolidator or aggregator) Amax in late 2007, was branded as the “King of VIP” and the “busiest casino in the world” in terms of betting volume by March.

In February, Amax junkets generated about US $5.3 billion in rolling chip turnover for Crown Macau. As a result, Melco PBL’s total market share jumped from just 5.7 percent in November 2007 to over 18 percent in February 2008. Among the losers in this VIP commission war were SJM and Sands Macao.

As part of this business deal, Crown Macau offered 1.35 percent commission on chip sales to Amax. This was supposedly among the highest in the market, but it was suggested to be unsustainable, leading to little profit for any concessionaire.

Still, the first quarter of 2008 saw a 62 percent increase in gross casino gaming revenue over the same period a year earlier. In the first four months of 2008, visitors to Macau neared 10 million, up by more than 16 percent year-on-year. Mainland Chinese continued to arrive in Macau in waves, accounting for around 59 percent of this number.

The ills of an expanded VIP game play were clear to the Chinese central government. Macau’s casinos were supposedly (and secretly) frequented by an increasing number of suspected Chinese officials and managers of state-owned enterprises.

By April, some gaming executives and officials in the Macau government had expressed concern for the “unhealthy” growth of the VIP market segment. Commission had skyrocketed compared to a few years ago due to competition. Some junket operators were demanding the same kind of deal as Amax, or they would walk away to another casino operator.

To compete and boost volume, some concessionaires like Sands began to offer a higher commission rate to meet competition, and better access to credit to junket operators and representatives. New junket operators, as a result, started to give away easy credit to their players to entice them to play through them. These fresh battles between concessionaires for junket business resulted in lower profits for all. Only the junkets got to gain, and the balance of power had shifted.

Concessions Halt, Visa Crunch Begins

As competition continued to intensify in the VIP market segment, the Macau government announced it will stop granting new gaming concessions and approving land for new casino construction.

The move was seen by some analysts as a first step to slow down the explosive growth of Macau’s casino gaming industry, VIP in particular. The fact was the “unhealthy” growth of the VIP market segment had raised deep concern by the Macau and Chinese central governments. This was not sustainable. The explosive growth in VIP junket operations inevitably resulted in the export of social ills to mainland China.

These ills included gambling-related criminal activities like illegal loan sharks, embezzlement of public funds, money laundering and underground banking. Existing and new junket operations, riding a new wave of lucrative commission-based promotion, would actively promote and give out credit freely to mainland Chinese who were interested to gamble in Macau. Some of these “victims” would inevitably include high- to low-level state officials and managers in state-owned enterprises.

In May, top government officials sat with representatives from all concessionaires to discuss how to regulate Macau’s casino gaming industry. After months of cutthroat competition in the VIP market segment, enough was enough.

The Macau government must be feeling somewhat fearful of the implications that this might have on Macau’s future and the relationship between Macau and mainland China. Macau is supposed to become a multi-faceted entertainment city for families and businessmen, not a gambling-only city for hardcore gamblers. Some of the important issues put forward in this meeting included setting a maximum junket commission (at 1.25 percent of chip sales) and limiting the number of gaming tables for each concessionaire.

In the same month, authorities in Guangdong province announced the first of a series of visa restrictions on its residents who travel to Macau. Both individual and business travel permit applications were affected. These measures sent mini-shockwaves through Macau that further control would be following. By July, a final decision was already made to cap junket commission at 1.25 percent of chip sales and to cap the industry’s gaming table number at 4,000. However, many analysts thought that a cap was unlikely to be effective in curbing the junket war.

At the same time, the Macau government announced that mainland Chinese issued travel permits to Hong Kong would be unable to visit Macau using the same visa starting in September. The belt was tightening, but did it help kill the ills?

Economic Diversification?

By now, some observers suggested that Macau was too focused on gaming, and the role of Macau’s government in 2008 was to diversify the economy. Even before these calls for change, the Macau government was actively working to diversify its target markets beyond mainland China, and its economy, to include more non-gaming components.

What is more important at this stage is for Macau to build a stronger relationship with its neighboring Guangdong province-an important trading and gaming market for now. It would need to strengthen cooperation with neighboring Chinese cities to help them combat the ills.

By August, the government predicted a significant slowdown in next year’s gaming revenue. This was despite a 48 percent year-on-year increase in gross casino gaming revenue in the second quarter of 2008.

In October, the global credit crisis took a swipe at Macau. It was initially a crisis of confidence, and casino employees feared they would lose their jobs. Rumors were flying all over. Analysts started to predict a slowdown in spending among mainland Chinese and the availability of credit to gamblers. This might create an adverse effect on Macau’s casino gaming revenue.

In November, Sands Macao said it stopped all construction due to a lack of financing. Around 11,000 workers were asked to pack and go. The opening of Galaxy’s mega-resort was also postponed from 2009 to a later date. The third quarter of 2008 saw an increase of only 28 percent in year-on-year in gross casino gaming revenue.

By now, Macau’s gross casino gaming revenue had already exceeded its revenue for the entire year of 2007. However, Macau’s gross casino gaming revenue had been dropping from quarter to quarter in the entire year of 2008. The final quarter of 2008 saw a gross casino gaming revenue of just US$3 billion, compared to US$3.25 billion, US$3.61 billion and US$3.73 billion in Q3, Q2 and Q1 respectively.

Nevertheless, the 2008 Year of the Rat had been a good year for Macau’s dragon industry. Gross casino gaming revenue hit a total of approximately US$13.6 billion in 2008. Impressive, given that it was just US$3.6 billion (with 424 tables and 814 slots) in 2003.

Desmond Lam is a visiting senior research fellow at the School of Marketing/Ehrenberg-Bass Institute for Marketing Science, University of South Australia. He can be contacted at