The economy of Macau has been built on gambling. Here it is so huge that Las Vegas seems to be a small rural town compared to it. You can make a comparison: revenues of casinos in Macau in the previous year that was not the most successful exceeded $44 billion, while the entire U.S. gambling industry in the most profitable 2007 earned $37.5 billion.

Nowadays the Chinese government is fighting against corrupt officials and money laundering in Macao, and the cash flow from high rollers is drying quickly.

If the casino and resort industry of Macau wants to survive in these harsh times, it has to change. The ultra-rich players can no longer go there in such numbers as they used to, but the culture of luxury gambling trips, known as junket tours, and fears of Chinese triads still remain. Macau needs to implement reforms.

Rise of Macau

Hong Kong is the banking capital of Asia, as well as Macao is its gambling Mecca. Macau, as well as Hong Kong, was controlled by the colonial authorities: until the end of the 1990s it was considered as overseas province of Portugal. The heyday of gambling in Macau began when China assumed formal sovereignty over it. It happened on 20 December 1999.

The 40-year monopoly on gambling in Macau was owned by one person, namely the billionaire Stanley Ho, but in 2002 the authorities opened this business to other Chinese tycoons and allowed some foreign investors to enter this market. The first foreigner, who built a casino here, was Sheldon Adelson.

The personal Adelson's income from his casinos and resorts has grown exponentially, reaching $33 million a day in 2013, and today, his fortune exceeds $28 billion. In 2004 the Adelson's Las Vegas Sands Corporation invested $265 million in building its first casino in Macau, which was called Sands Casino. Then, Adelson made an agreement with the authorities of Macau, according to which he would have to invest $12 billion in the construction of casinos, hotels, exhibition centers and shops.

At that time Macau started competing with Las Vegas. So, in 2004, gambling revenues in Macau were about $7 billion and did not reach income of gambling industry in Las Vegas, which was $10 billion. Adelson received nothing. But in 2012 Las Vegas Sands received more than 50% of its revenue from Macau, and the special Adelson's dividends at the end of the year were $1.2 billion. By 2014, Macau gambling revenue was almost seven times higher than in Las Vegas. The share of US companies, including Las Vegas Sands, Wynn Resorts and MGM, comprises over one third of all revenues in Macau.

The Inside Of Casino Activities In Macau

The bulk of casino revenue in Macau does not come from ordinary people, who visit casinos to shift several hundred dollars of their savings playing slot machines or roulette. The significant percentage of casino income is received from the high rollers, who wager hundreds of thousands of dollars playing in VIP rooms.

These VIP rooms have other principles of operation than casinos for the general public. Groups of promoters search and attract rich players from all over the East Asia to gambling junket tours, offering them charter flights and special conditions for accommodation. Casinos rent VIP-rooms in their hotels to junket operators. In some cases, they just receive the percentage of the income in exchange for the provision of customers. U.S. casinos are superior to the local ones, because they provide rich players with security guarantees and control everything that happens on their territory.

The organization of junket tours in Macau for high rollers is not a simple thing. One of the problems is that most of these high rollers are businessmen and officials from China, who can not take out large amounts from China according to its legislation. Their limit is about $3,300 for one time and not more than $50,000 per year.

One of the possible solutions for junket operators is the provision of loans for their wealthy guests. Losses can be paid after the trip back to China. But it's a big risk: since gambling is illegal in China, these debts can not be appealed in the courts. Therefore, junket operators should take other measures to guarantee receiving debts of those who have lost. After all, these debts are not the propriety of casinos. They belong to the junket operators and their sponsors, who risk their money providing loans for players.

Such a statement of question led to the creation of the entire network, including promoters, licensed junket operators, investors and guarantors. The experts of this industry report that it is very difficult or even impossible to know who exactly is involved in these trips in this situation despite the fact that casinos state that they know with whom they deal due to verification procedures.

The collection of debts is a challenge even for those who admit their participation in the junket business. Tony Tong is one of the businessmen who organizes junket tours. He says that junket operators and their patrons could not recover their debts through legal channels, even if they would be allowed by law. Therefore, in some cases it is possible to use "traditional means."

What You Should Do If You Are Unable To Fix Problem Legally?

The debt recovery has been traditionally considered to be a business of Chinese triads. People, who have worked in law enforcement of the region, clearly say that in some cases, the triad knocks out gambling debts with the help of the violence.

"You do not need to be Sherlock Holmes to understand that the triad and organized crime groups are closely linked to junketers because of the necessity to recover gambling debts" - said Steve Vickers, who is a former police officer in Hong Kong, specializing in the gambling sector of Macau. - "Triads may be very cruel knocking out the debt. They can make anything starting from knocking on your door or calling five times per day and ending with physical attacks, injuries and even tortures. "

It should be noted that the triad plays a strange role in Chinese society. The membership in the triad is a crime and the members of the triad do not show their activities. However the Chinese government does not chase people just because they are members of the triad.

The result of the activities of this non-transparent network, which can be schematically expressed as: casino - junket operator - triad, is the movement of tens of billions of dollars of "dirty" cash both from and in Macau. Thus, in 2013 the report of the Advisory Committee of the U.S. Congress included the information that the real value of the Macau gambling industry was probably six times higher than the amount indicated in the official statements of U.S. gambling companies. Thus, their actual income could exceed $200 billion.

There are quotes from this report:

In Macao, there is a great risk of money laundering in the VIP rooms, which are physically carried out in casinos, but are not officially supervised by casinos.

If Macao resembles Las Vegas, it is not purified Vegas of 2015, but rather Las Vegas of the 1950s, but on a much larger scale.

The problem of large U.S. gambling corporations, such as Las Vegas Sands, which are primarily regulated in the United States, is that they somehow have to deal with this semi-legal networks. Therefore, casinos have to report about the steps that they have undertaken to control the VIP rooms in their establishments. One of such steps is the appearance of the electronic monitoring and audit.

Why Did The Recession In The Gambling Industry Begin?

The gambling industry in Macao has been involved for many years in cautious, but very profitable interaction with the Chinese junketers and triads that help junket operators. Therefore, their revenues have been steadily increasing for the last decade.

But it seems that the good times are coming to an end. The new Chinese President Xi Jinping, unlike his predecessors, began to fight against corruption with real deeds instead of worlds. He took a tough stance against the Chinese party leaders, who showed their wealth too provocatively, including trips to Macau.

The anti-corruption campaign in China is now the most severe since the foundation of the Republic in October 1949. When Xi Jinping became the Head of the Party in November 2012, more than 100,000 party activists were put on the lustration list.

And his fight against corruption in China has already begun to have an impact on casino revenues in Macau. Gambling revenues in Macau decreased by 2.5% in 2014. It was the first year with the reduction of income for the recent few decades and a sign that the heady growth of casino income was left in the past.

The first data for 2015 are significantly worse:

  • January revenues were reduced by 30% compared to January of the previous year;
  • in February that is the most profitable month for casinos, when the Chinese New Year is celebrated, the results were disastrous: casino revenues in Macau dropped by 48.6% compared to February of the previous year;
  • in March gross revenue of the world's largest gambling hub decreased by 39.4 percent;
  • In April it was reduced by 39 percent. According to the results of the four first months, the income was reduced by 37 percent.
  • Mai is the twelfth month of the decrease, gross revenue in this month was reduced by 37.1 percent.

But it seems to be just the beginning, because the fight against corruption in China is growing and expanding. After the party officials the corruption investigations are extended to heads of state-owned enterprises that dominate the economy of China in the fields of finance, energy, transport and other industries. This year, China chose 26 state-owned enterprises as targets for anti-corruption verifications.

Beijing summons the administration of Macau to diversify revenues from gambling and curb the high rollers from the mainland.

Taking into account the current policy of China and the changing moods in Macau, we do not expect that the situation will improve and the main driver of income will begin to grow, - said the associate director at Simsen International Financial Group Jackson Wong. - Many people have lost faith in the gambling sector, and that is why it is sinking into the abyss.

Forecasts

Analysts reduced this year their forecasts for revenues from gambling in Macau by several times after the Chinese President Xi Jinping had said about the expansion of his fight against corruption and after the economic growth in China had slowed down.

It is expected that gambling revenues increase their reduction to 21 percent this year compared to the decrease by 2.6 percent in 2014.

The output in Macao was reduced by 24.5 percent in the first quarter when travelers started spending less. The number of visitors of Macau decreased by 3.4 in April, while the number of visitors from the mainland, who make up two-thirds of the total output, was reduced by 6.4 percent.

The opening of two new casinos of Galaxy Entertainment Group Ltd in the last month marked the beginning of a new era, when each of the six gambling operators from Macau, will pay attention to non-gambling opportunities in the style of Las Vegas in order to attract customers back. Melco Crown Entertainment Ltd is going to open the new resort and will build the tallest Ferris wheel in Asia. Sands China Ltd is going to build a replica of the Eiffel Tower in half the size. Bosses of casinos hope that the number of new gambling establishments will be able to return customers.

We do not expect the further significant recession - said Grant Goversent, an analyst at Union Gaming Group in Macau. - However we accept that these trends can still keep developing for several months, before we see an upside breakout.

Thus, the golden era of semi-legal gambling in Macau has come to an end. The reversal may occur when casino will be able to get profits from ordinary people instead of very wealthy customers. According to the Order of the Government of Macau, casinos have to start attracting tourists of the middle class, which should provide the consistent and steady economic growth.

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