David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Is China's Gilded Age back?

Three-and-a-half years after President Xi Jinping started his crackdown on corruption and lavish spending, there are signs that the belle epoque may be ready for one more round. Shares of Kweichow Moutai, the maker of $500-a-bottle firewater, hit a record Wednesday, and an index of Shenzhen real-estate prices has almost doubled in the past 12 months.

Now Melco Crown, the Macau casino operator at the forefront of Beijing's push for a more egalitarian style of fun at its Hollywood-themed Studio City complex, is looking to introduce private gaming rooms for high rollers there, according to Daniela Wei of Bloomberg News.

Not-So-Important Persons
VIP winnings are making up a much smaller part of Macau casinos' revenues
Source: Bloomberg
Note: Shows VIP revenues as share of casino revenues for all companies except Sands China, which shows VIP wagers as share of all casino wagers

Melco has never entirely ruled out having such rooms at the property, but to see them actually opened would be quite a turnaround.

Because of the luxury crackdown, all six Macau casino companies have been making do with less revenue from VIP gamblers, who habitually bet $10,000 a hand on baccarat and are treated like emperors in return. Even Steve Wynn, the Las Vegas mogul who regards his resorts as positioned at the very top end of Macau's market, saw the number of table games catering to mass-market players overtake the glitzier VIP tables in December.

Money Isn't Everything
Wynn Macau is running more mass-market table games than VIP ones for the first time in six years
Source: Company reports

Studio City was never really pitched at high rollers, who tend to find that Batman rides and Tom and Jerry playgrounds cramp their style. Its struggles to get permits for even mass-market tables continued until days before the site opened. So why private gambling rooms?

One reason is desperation. Stuck on a patch of reclaimed land surrounded by yet-to-be-completed resorts, Studio City isn't close to meeting expectations. "We're not totally happy with our own efforts," Chief Executive Officer Lawrence Ho told an investor call in May. Macau's government granted the casino 250 mass-market gaming tables, compared with the minimum of 400 Ho had told investors it needed last February.

While Melco Crown is still the most highly rated Macau casino stock, valued at 31 times forecast earnings over the next 12 months compared with a median of 20, beneath the surface it's struggling to make an economic profit. Its weighted average cost of capital has risen from 8 percent to 10.8 percent over the past year, according to Bloomberg estimates, while its return on invested capital has slipped to 0.7 percent. Ideally, returns ought to be higher than costs.

Getting a few VIPs in might help. High-rollers tend to be surprisingly low-margin players, due to the cost of providing all that free stuff and their focus on games where the odds are most in their favor. But the vast sums they wager allow casinos to hold less cash against outsized payouts, which would help bring that cost of capital back into line.

Result: Misery
Macau's gambling crackdown is pushing it perilously close to running a budget deficit
Source: Macau Financial Services Bureau
Note: 2016 figures are for January-May.

Melco may also be pushing at a door that's a bit more open than it was in the past.

Tax revenue from gambling, which typically makes up more than 80 percent of Macau government revenues, is running this year at its lowest level since 2011. Government spending in the five months through May rose 12 percent from a year earlier, while revenue fell 14 percent -- and the start of the year, when Lunar New Year drives wagers to their annual peak, ought to be the best period for the budget. The shocking prospect of the territory running a deficit is a live issue, raised by Melco's Ho among others.

If Studio City is allowed to open the rooms, it would represent just a toe in the water. Just three VIP rooms are planned at present, people familiar with the matter told Bloomberg's Wei -- less than 1 percent of those run by SJM Holdings, the biggest player.

Poor Little Rich
Revenue from VIP baccarat as a share of all gaming revenue appears to have bottomed out
Source: Direccao de Inspeccao e Coordenacao de Jogos, Bloomberg calculations

Still, any turn back upmarket would suggest the shape of Macau's casino industry is changing again. As a share of total gambling revenue, VIP baccarat has been edging upward for two quarters. The city's glory days may yet get a fresh lease of life.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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David Fickling in Sydney at

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