Speaking to Bloomberg News at the end of 2014, a year Macau’s casino operators and their investors would rather forget, Standard Chartered analyst Philip Tulk echoed a sentiment broadly shared by his peers when he declared, “The VIP heyday is over.”

How this plays out in 2015 is anyone’s guess at this point, but it’s expected that the factors that combined to slash the volume of high-roller play by some 40 percent last year—and lop off more than US$3 billion in VIP gaming revenue in the process—will, in the main, persist. Behind most of them is a massive central government crackdown on corruption and capital flight which has now assumed the dimensions of a full-blown Maoist-style purge, sweeping up more than 75,000 mainland officials with varying degrees of seriousness since President and Communist Party General Secretary Xi Jinping assumed power in late 2012 and reaching into the highest levels of the political and economic life of the country.
Prior to January’s 17.4 percent decline in gaming revenue market-wide, the expert view was that VIP largely had stabilized, albeit at a new low roughly defined by the triple-digit declines seen toward the end of last year. VIP’s impact on January hadn’t been calculated as of this writing, but February is likely to be a lot worse. Checks conducted by Wells Fargo analyst Cameron McKnight in the first week showed the overall daily take trailing January by 13 percent on average, and despite a favorable 2015 calendar that places the weeklong Chinese New Year holiday entirely within the month, the record of $4.8 billion in total gaming revenue set in February 2014 will be impossible to approach, and most analysts expect the market will fall shy of this by 35 percent or more.
In VIP terms, current consensus is for the pain to top out in the first quarter at around minus-30 percent year on year, improving to declines in the mid-double digits in the second quarter, the mid-single digits in the third, returning finally to growth mode by the fall. The forecast for the full year is in the range of minus-9-11 percent, or comparable to 2014. If that holds true, a market which in the space of a decade had lifted Macau to the size of seven Las Vegas Strips, peaking in 2013 at almost $30 billion, will have shed over a scant 24 months more than 20 percent of its worth—in US dollar terms, close to $6 billion, or about what the entire Strip takes in in a year.
As Credit Suisse analysts Kenneth Fong and Isis Wong put it in a January client note, “We believe some of the traditional beliefs towards the sector need to be revisited as we enter a ‘new era’ with ‘new’ industry landscape.” 

To summarize those beliefs in broad terms, these were: 1) that China represented a virtually limitless pool of passionate would-be gamblers, high rollers and mass-market both, whose wealth was growing by leaps and bounds and whose immense numbers Macau had barely tapped; and 2) that Beijing, with one eye on an increasingly restive Hong Kong and another on the eventual repatriation of Taiwan, had an overriding geopolitical stake in Macau’s prosperity and therefore would do nothing to impede the flow of those gamblers to the only place in China where they could indulge their passion legally.
If you had polled the analyst community at the end of 2013 you would have found few who doubted the market could double in size before the decade was out, or certainly that $75 billion was well within reach in five years as billions in investment in new super-resorts came on line in the burgeoning Cotai tourist district.
Xi’s anti-graft drive was well in gear at that point, and everybody knew about it, but for the reasons just outlined, no one believed it would touch the massive shadow banking system in mainland China that provided much of the easy credit fueling the VIP trade—or, for that matter, the massive shadow banking system represented by the junkets that control the business through their ability to recruit players on the mainland and bankroll bets that have been known to reach seven figures on a hand of baccarat.
Through the junkets billions of dollars routinely flow into and through Macau as though the central government’s strict currency controls don’t exist. The problems inherent in this system, the unaccountability that is fundamental to it through channels such as rampant off-the-books side betting*, was considered one for regulators and law enforcement agencies in the West to scratch their heads over if they wished.
(*side-betting is arranged between junket and gambler. One mechanism used is to agree a multiple to be applied to every chip officially placed on the table. The side-bets are then calculated and settled between junket and gambler without them being recorded by the casino/VIP room).
As it turned out, Xi and his graft-busters were zeroing in on capital flight and illicit money flows as major obstacles to their mission to stamp out China’s endemic corruption, and they had identified the junkets early on as one of the pipelines. The new regime was only weeks old at the end of 2012 when it was reported that several Macau operatives had been brought to the mainland for questioning in connection with the investigation into convicted Communist Party high-flier Bo Xilai, the first prominent scalp Xi’s campaign would claim.
In February 2013, a report out of the Beijing bureau of The Times stated that a junket crackdown was imminent. The industry and the analysts scoffed. The system was flourishing wildly and it looked impregnable.
THE ‘LEHMAN MOMENT’
“VIP revenue growth took off in 2H13,” as Fong and Ms Wong of Credit Suisse recount it, “boosted by the rapid rise of the side-betting business and abundant liquidity in the system.”
It was a system awash in hot money. Commission rates were soaring, generating higher returns for junket agents, incentivizing them to pursue more business for their bosses and enticing new agents to enter the system. Fat returns boosted churn and plowed more financing into the games. Thus equipped, the junkets were able to offer more attractive terms to their investors and obtain more financing to inject into the system to generate more demand.
To quote the two analysts, “The higher rate of return from side-betting laid a foundation for junkets to create strong and recurring capital inflows.”
The surprising part, in hindsight, is that it seemed to bother no one that none of this side-betting was recorded in the casinos’ ledgers or reported to the Macau government for tax purposes—it was, in other words, completely illegal. Yet, just as the system was bursting at the seams the cracks running through it were getting wider. Early last year, prosecutors in Hong Kong and mainland China were deep into a wide-ranging investigation in connection with a three-year probe that resulted in the conviction and imprisonment last March of Hong Kong sportsman Carson Yeung (he was chairman of Birmingham City FC at the time) on money-laundering charges. Yeung was an investor in VIP rooms run by Neptune Group, one of Macau’s largest junkets, and had extensive ties to underground banking on the mainland, according to evidence presented at his trial.
A month later, the wife of Cheung Chi Tai, at one time a major stakeholder in Neptune, was arrested by Hong Kong police and a reported HK$200 million in her possession was seized. It was reported at the same time that investigators had compiled a list of 20 junket operators who allegedly were assisting corrupt mainland officials to launder money. Dozens of individuals would be detained and questioned as a result. In December, Cheung himself, accused in a U.S. Senate report some years back of being a high-ranking triad member, would be targeted by Hong Kong authorities in a money laundering probe and the assets of several of his companies would be frozen. He also has been tied to an alleged World Cup gambling ring that was busted in Las Vegas last summer. Eight people were arrested in the case, and U.S. authorities claim to have computer and phone records seized from the operation which indicate, they say, that Cheung’s companies were helping the ring settle up with gamblers.
Five days prior to Ms. Cheung’s arrest, although it would not be reported until May, one of the principals of a relatively obscure junket called Kimren disappeared with HK$8 billion-$10 billion in investor funds earmarked for side-betting. At that point, mainland high rollers fearful of the long arm of President Xi had already begun to avoid Macau, though it was scarcely noted at the time. But then news of the Kimren incident broke, and it was, as former gaming analyst and prominent industry investor Jason Ader famously termed it, Macau’s “Lehman moment”—an apt turn of phrase, for it was the beginning of something very much like a crash. In May, VIP revenue fell year on year for the first time since the global credit crisis of 2008-09. By the summer, the Chinese government was cracking down on a widespread practice by which mainland travelers—and junket agents—were able to squeeze the system for more visits to Macau by booking flights to third countries then canceling the tickets once they were over the border. VIP revenue would fall 6 percent in the second quarter, 19 percent in the third. At that point, mainland government officials were reminding the city in increasingly stern language of its patriotic duty to wean itself off its dependence on gambling.
“It is very important to keep in mind that Chinese society works quite differently than Western society,” investment brokerage Union Gaming Research Macau observed in a recent client note. “When the government implements an action, people tend to get in line overnight. It is this dynamic that has led to the various and often dramatic ‘legs down’ in GGR over the last year. On practically an overnight basis last spring, about 20 percent of VIP volume disappeared as word got out that the anti-corruption drive was much more real than it had initially appeared. In other words, everybody who felt they were at risk immediately stopped such risky behavior—there weren’t hangers-on.”
With VIPs scarce or gambling less, and investors rattled by the Kimren disaster, and with economic growth on the mainland slowing, the junkets found themselves by mid-year staring at an epic liquidity crisis. Dore Holdings, one of the largest, closed shop. Dozens more have folded since Xi came to power. Morgan Stanley estimates that around one-third of VIP rooms have closed or curtailed their operations. As Standard Chartered’s Philip Tulk suggested, the system was “near broken”.
In December, Xi arrived in Macau for celebrations to mark the 15th anniversary of the city’s return to Chinese sovereignty. “Macau’s economy has developed rapidly in the past years, but certain deep-seated problems have surfaced and development risks have built up,” he said. He called on the local government to summon “greater courage and wisdom” to “strengthen and improve regulation and supervision over the gaming industry”.
The message was not lost on Macau Chief Executive Chui Sai On, who promptly announced that his administration would conduct a “review” of the industry this spring. On 19 December, the day of Xi’s arrival, the city’s Gaming Inspection and Coordination Bureau issued a formal notice to the junkets requiring them to verify that their agents have no criminal records. Industry financier Tony Tong of Hong Kong-based Pacificnet Ventures says at least 4,000 of the system’s estimated 5,000 agents are not properly registered.
The South China Morning Post reports that the Economic Crimes Investigation Bureau of China’s Ministry of Public Security is leading an additional investigation into illicit money flows. In December, the bureau sent representatives to meet with regulators and law enforcement agencies in Macau to discuss “criminal activities” involving the country’s popular state-backed UnionPay debit and credit card system, a porous network through which it is believed that hundreds of millions of yuan have been funneled into Macau and its casinos in contravention of currency limits. The Post cited documents indicating that Macau’s Monetary Authority planned to follow up in January by summoning the city’s top bankers to a meeting to “explain a live monitoring system” which will give Beijing unprecedented access to all transfers conducted through UnionPay.
It is a very different China under Xi Jinping. And it will be a very different Macau, its vaunted VIP market, for years the envy of the gaming industry worldwide, in “structural decline,” in the view of Deutsche Bank’s Karen Tang.
“We believe, while the number of VIP players may still grow, the average bet size of these VIP players will be significantly lower than in the last five years,” she wrote in a January report to investors. “We also believe that wealth creation in China is changing from ‘resources and relationship-based’ in the last five years (as in the coal mining and property industries) into ‘innovation and entrepreneurial-based’ (as in Internet and consumer services) in the next five years. While these newly minted millionaires may also be gambling VIP style, their average bet sizes will also likely be lower than the previous generations of coal mine-owner VIPs.”
On 9 February, the corruption crackdown claimed a 48-year-old Sichuan tycoon named Liu Han. He was executed with a younger brother and three others for crimes ranging from murder to gun-running to organizing casinos.
He had made his fortune in mining.