Back in November China’s president Xi Jinping announced that his government is pushing forward with reforms that will see it gradually liberalize interest rates and open its capital account. That might seem a somewhat mundane piece of economic news but for Macau’s casino operators it is a potential problem. For, as Quatz reports this morning, Chinese citizens aren’t allowed to move more than $50,000 a year out of the country.
One of the only ways of circumventing these controls is through Macau’s shady triangle of VIP baccarat rooms, “junkets” and underground banks. ”No funds actually cross the border, so this method is difficult to detect and impossible to measure,” Stephen Green of Standard Chartered told the Wall Street Journal (paywall) in 2012.
Back in October 2012 Quartz explained how it works:
1) Sign up with travel companies known as “junket operators.” These high end tour agents make a living transporting Chinese gamblers to Macau and arranging their accommodation and, crucially, their casino credit.
2) Borrow money from the junket operator to fund the gambling.
3) Head to casino and pick up gambling chips from the junket [usually in VIP baccarat rooms run by the junkets].
4) The chips the junkets provide are called “dead” chips because they can’t be traded for cash and have to be played. But when a player wins a bet, he is paid in cashable chips, which he can exchange for Hong Kong or US dollars inside the casino.
It is this lurk that threatens to close. If and when China loosens capital controls there will be possible to move capital across the country’s borders more freely. There will be less need to run money through Macau’s VIP rooms. VIP rooms accounted for more than 70% of Macau’s revenues, reported The Economist in 2011.
The potential impact on Australia’s Crown casino group is shown in the review presented at its October annual general meeting:
Quartz speculates that despite their lip service to the idea, Chinese leaders could well continue to sit on reforms. In the meantime, though, it argues that this chart offers another cause for concern:
Many China-watchers suspect that much of China’s trillion-dollar stimulus starting in 2009 found its way to Macau, via the accounts of state enterprise bosses. Tellingly, gaming revenue growth plummeted in 2012, when the government began tightening, picking up only after the government re-opened the spigots in 2013. Shadow banks that facilitate tens of millions a day in foreign-currency exchange via Macau also support local governments and small businesses with credit, as Reuters reported in Jul. 2013. Tighter lending conditions in 2012 aimed at reining in local government debt left them with less money to lend to Macau.
The correlation isn’t definite. But if it’s there, it means that the Chinese government’s push to impose discipline on leveraged businesses and local governments could make double-digit growth in Macau casino revenue a thing of the past.