strong hand

Macau's No Sucker, China Bets

Brisbane, Manila and other regional rivals look the likely losers if Hainan becomes a casino hub.
Photographer: Anthony Kwan/Bloomberg

Beijing has had enough of foreign governments eating its lunch.

Authorities are drafting a proposal to allow gambling on Hainan Island, Bloomberg News reported Friday, citing people who asked not to be identified because the discussions aren't public. Online gaming, a lottery or sports betting are being considered under the plan, which could open to the door to physical casinos in the province in the long term, they said. Macau is currently the only location under Beijing's jurisdiction where such resorts are permitted. 1

One argument for decriminalizing a practice that China banned in 1949 is that prohibition is simply handing money to foreign casinos. Macau is almost permanently booked out: Even after adding more than 9,000 rooms since the start of 2015, increasing capacity by a third, occupancy rates in the territory's hotels have never dipped below 75 percent. They hit a record 92.5 percent in December.

No Room at the Inn

Macau's hotel occupancy rate hit a record 92.5% in December

Source: Bloomberg

As a result, a string of resorts in Singapore, South Korea, the Philippines and Australia have been lapping up the surplus, alongside a handful of more exotic tables in locations such as Laos, northern Vietnam, and the U.S. Pacific island territory of Saipan. Governments in Japan and Mongolia have been looking to get in on the act, too, with plans to legalize the sector.

Looked at this way, the ban seems like a catastrophic own goal. By restricting the domestic supply of baccarat, blackjack and slot machines, the government is pushing gambling dollars offshore -- supporting jobs and tax revenues elsewhere in the region while encouraging tourists and junket operators to poke holes in Beijing's capital controls.

If Chinese gamblers were placing bets in Ma'anshan rather than Manila, maybe provinces and cities wouldn't need to fund themselves via the wild west of local government financing vehicles, explored by Gadfly's Andy Mukherjee this week.

That's the theory, anyway. In practice, evidence on the economic benefits of casino legalization is murky and mixed. Centers like Monte Carlo, Las Vegas and Macau have historically done well by exporting casino services to their hinterlands, becoming entrepots for a region's gambling dollars.

In that model the costs of casino gambling -- in terms of addiction and the cannibalization of spending on other leisure industries -- are spread widely, while the benefits are concentrated in one city. Zoom out to society as a whole, or allow the industry to become more evenly distributed by removing prohibitions, and it's not clear there are net benefits at all.

One recent study found that state revenues in the U.S. even declined marginally after the introduction of casinos, perhaps because the tables and slots sucked up spending that would otherwise have gone into other taxable activities. Stimulus effects tended to be short-lived, too, the study found.

At the same time, Macau's lead as the world's largest gambling destination remains hard to beat. Las Vegas has continued to prosper since casinos started springing up on Native American lands in the 1980s by turning itself into the global capital of the MICE -- meetings, incentives, conferences and exhibitions -- industry.

Gaming has accounted for less than half of revenues at Nevada's casinos for more than a decade, a model that Macau has been pursuing for several years with the growth of mass-market resorts like Melco Resorts & Entertainment Ltd.'s Studio City and Sands China Ltd.'s Cotai Central.

Wanna Bet?

Gambling has made up the smaller share of revenues for Nevada's casinos for more than a decade

Source: Nevada Gaming Control Board

The greatest threat from an expansion of mainland casinos is to regional competitors rather than Macau's six operators. The world's biggest gambling destination can stand on its own two feet. Without the push from Chinese prohibition, though, Brisbane, Manila and Lao Cai may see their allure rapidly disappear.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. While most forms of gambling are prohibited, China has a national lottery and has long tolerated small-stakes wagers over household games of mahjong and dominoes.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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