Macau VIP ‘Crackdown’ Sounds Ominous—But Is It Really?
If you are an investor in Macau casino stocks, the run-up to China’s four-day Lunar New Year holiday is usually a time pleasantly spent counting gains.
Not so in this Year of the Snake, which has bared some fangs in the early going. A report on 5 February by The Times’ Beijing correspondent says the PRC is concerned enough about criminal infiltration of the junket industry to be planning a crackdown on its operatives in at least six mainland cities.

This was explosive news, considering that junket-driven high-roller play accounts for two-thirds or more of gambling revenues in this largest of the world’s casino markets. Investment analysts, citing industry representatives and their own contacts within the local junket community, were quick to discount the story, which, to be honest, was rather vague on sources. But that didn’t stop the shares of the market’s six Hong Kong-listed holding companies from tumbling on average almost 6 per cent last week, shedding about HK$46 billion of market value (£3.76 billion/US$5.9 billion) by the close of trading on Friday 8 February. 

Macau, being the only place in China where casinos are legal, raked in US$38 billion last year at the tables and slots, the equivalent of six Las Vegas Strips. Most of it by far is high-stakes baccarat, “VIP” play, as it’s known in industry parlance, which generated 68 per cent of total gross gaming revenues in 2012, and it’s wealthy Chinese from the mainland behind an estimated 90 per cent of it.
As the vital middlemen, travel agents, bankers and hosts to this enormous and enormously lucrative trade—identifying big spenders, transporting them to the casinos, staking them with credit and arranging luxury accommodations and other perks—the junkets are accustomed to periodic scrutiny, inconvenient as it may be. The volume of VIP play as measured by the churn in non-negotiable gaming chips with which it’s conducted exceeded US$6.64 trillion last year. This occurred under the very nose of a government that says individuals and companies can take out of the country no more than the equivalent of $50,000 a year (£31,650). 
So the reality, which is one of a vast underground financial and currency trading network, unsupervised and unregulated, with connections not only to Macau but to Hong Kong and beyond, is both known to the authorities and largely accepted by them because it is necessary in a country that prohibits casino marketing, officially restricts cash outflows and doesn’t recognize gambling debts as enforceable in law.
This is instructive as a measure of the depth of the central government’s commitment to Macau’s continued success, evident in things like the large-scale public spending of recent years on improved rail access and border crossings, in the relaxation of restrictions on individual travel, in investment in neighbouring Hengqin Island. To the degree that a prosperous Macau can be spun as a reflection of the wisdom and benevolence of the Communist Party, it serves as a check on impertinent and unruly Hong Kongers and, perhaps above all, as an enticement to Taiwan to surrender to the motherland’s embrace.
But obvious as well are the opportunities this shadow banking system affords for all sorts of activity that does not reflect so well—for bribery, fraud, embezzlement, loan-sharking, money-laundering and as a conduit for some of the trainloads of cash the wealthy are reported to be spiriting out of the country, legally and illegally, to avoid taxes and as a hedge against political and economic uncertainty. 
The precise scale of this flight is impossible to determine. Estimates range from the more than $600 billion in 2011 suggested by Global Financial Integrity, a Washington, D.C.-based NGO, to the more conservative $225 billion put forth by The Wall Street Journal for the 12 months ended last September, a figure that includes legal outflows and some portion of what is illegal.
While hardly an economic crisis, nonetheless, when combined with the flight of the wealthy themselves, which also is on the rise, this is dilemma for a new party leadership looking to solidify its mandate by taking highly public stances against official corruption and abuses of power.
“We’ve been paying close attention to possible money laundering or abnormal capital flow in the city, and would tackle these cases seriously,” Macau Secretary for Economy and Finance Francis Tam said earlier this month. “The government will reinforce efforts in this respect including improvement of the Financial Intelligence Office’s functions, and closer cooperation with the police.”
It is interesting in this regard that The Times story specifies that it is “Triad-linked” junket operators in the cross-hairs. Indeed if a “crackdown” is imminent that is where it is likely to land. This should alleviate most fears about any serious disruption to the market. And the implications for top-line growth then should be minimal.
In the closing months of 2012, police on the mainland and in Macau detained operatives from several of the biggest junkets, among them a partner in one of the largest who was identified in a 4 December Wall Street Journal report as having ties to Bo Xilai, the disgraced former party boss of Chongqing whose wife was sentenced to prison in August for the murder of a British businessman. One casino executive described the arrests as “an attempt by the Chinese government to tell people in the market that they need to behave, especially regarding underground money transfers.” 
Operators’ stocks plunged after this report too. A week later, Bai Zhijian, the PRC’s man in Macau, went out of his way to make it known that these measures did not signal any official change of attitude toward the gaming industry. “Measures against corruption and casinos are not the same matter,” he said. “Every place across the globe is talking about anti-corruption and there are casinos everywhere. These are two different matters.”
Yet, not only didn’t VIP revenue miss a beat over all this, it had come roaring back in the fourth quarter after a rare decline (1 per cent) in Q3. The reason? A rebounding Chinese economy, which surpassed expectations to grow 7.9 per cent in the final three months of the year, reversing seven consecutive quarters of slowdowns. 
Turnover in non-negotiable chips was up a corresponding 6.8 per cent, and the sector took in $6.83 billion, its best three revenue months in absolute terms ever, capped by a December that saw VIP revenue jump 16 per cent year on year. Total GGR ended the year up 13.5 per cent.
This year, VIP revenue is forecast to grow in the range of 5-15%, and the industry as a whole, fuelled by a surging mass market, in the range of 20-28%.
Tam, meanwhile, says the government will be beefing up its procedures for licensing junkets. “We’re planning to exercise stricter examination of their registration. The government is reviewing its current practice in this respect in order to have a closer check on their qualifications, particularly whether or not they have criminal records.” 
Speaking two days after The Times story broke, he had nothing to say about its contents. He didn’t deny them either.
“It’s been the government’s established policy to maintain a stable and healthy development of the gaming industry,” he said. “Should we find any illegal activities in the sector, we won’t turn a blind eye to it.”