Event

After having denied it for years, Beijing could consider launching a pilot project in tourist-popular Hainan Island to allow online gambling, and potentially over the long term physical casinos. The aim would be to raise Hainan’s attractiveness for Chinese tourists and gamblers, boost local revenues and rein in capital outflows from mainland China. The plan would also contribute to heighten the fight against illegal gaming by broadening access to a more controlled legal activity. If implemented, this plan would mark a reversal of the ban on gambling activities on mainland China, and could cloud Macau’s economic future which greatly depends on the monopoly it enjoys in China.

Impact on country risk

In addition to the continuous corruption crackdown and tighter controls on capital outflows under Xi Jinping’s rule, Beijing’s draft proposal could represent another shock for Macau. Indeed, outside Macau and Hong Kong (only for gambling), gambling and casinos are illegal in China. Since 2006, Macau has become the gambling’s mecca, well ahead of Las Vegas. However, the situation turned sour as from 2014 when the Chinese President launched a massive anti-corruption campaign throughout China.

It led many party officials to choose to drastically reduce their luxury spending and gambling activities, at least in Macau. As a result, the number of Chinese visitors to Macau – which accounted for 2/3 of the total visitors’ number – fell and gaming receipts tumbled. It drove the former Portuguese colony into a three-year long economic recession equivalent to a 25% drop in real activity. Meanwhile, on Mr. Xi’s request, Macau has slowly begun to adjust to this new reality by diversifying its economy towards a more family-friendly gaming industry, non-gaming tourism and financial services, thereby somewhat reducing (from 70% to 65% of total export earnings between 2014 and 2016) a still high reliance on the gaming industry.

Last year, on the back of a robust Chinese economic activity, GDP growth turned positive and soared to an expected 13.4%. Now, favourable MLT growth forecasts – above 5% – might be challenging with the Hainan project that is likely to weaken Macau’s growth potential while the anti-corruption drive is expected to endure. Chinese visitor flows to Macau and the country’s public revenues will inevitably decrease if gambling and potential casinos are allowed elsewhere in China. That could also threaten multibillion casino resorts investment plans and undermine the renewal of casino operators’ licences. Beside the possible competition from mainland China, Macau is facing the development of casinos in countries such as Australia, the Philippines and Singapore which try to capitalize on the widening Asian middle-class’ gambling thirst. Indeed, the gaming demand is picking up fast in the region, first from the Chinese, which might explain why China would opt to capture it on mainland China. All in all, unless amended or providing Macau a long transition period, Beijing’s reported future plans on developing the gaming activity on mainland China should result into some deterioration of the economic and MLT political risks in Macau.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com