The Real Reason Macau's Casinos Are Suddenly Empty

A trip to the high-roller tables in Macau or Las Vegas strip casinos over the holidays revealed an unexpected, eerie (and terrifying if one is a bondholder in said casino) sight: empty chairs as far as the eye can see. Indeed, as Bloomberg reports, "Macau’s casinos just recorded their worst year, ending a decade of expansion that turned the former Portuguese enclave into the world’s biggest gambling hub. More tough times are ahead. Casino revenue in the city fell 2.6 percent to 351.5 billion patacas ($44 billion) in 2014, after a record 30.4 percent monthly drop in December, according to figures from Macau’s Gaming Inspection and Coordination Bureau today. Analysts projected a 2 percent annual decline, based on the median of nine estimates in a Bloomberg News survey."

Casino revenue fell to 23.3 billion patacas in December for a seventh straight month of decline and the biggest drop since Macau began recording monthly figures in 2005. That compared with a median estimate of a 30 percent drop in a Bloomberg News survey of 11 analysts.

 

Macau had posted its smallest annual casino revenue gain of 9.7 percent in 2009, after it began yearly records in 2002.

So what are the stated reasons? Chief among them: a crackdown on corruption by China's government, coupled with background checks on Macau gamblers.

Chinese President Xi Jinping’s bid to catch “tigers and flies” in an anti-corruption drive and weaker economic growth means Macau may face shrinking revenue until at least mid-2015, when new resorts open. The crackdown has deterred high rollers who account for two-thirds of Macau’s casino receipts, and wiped out about $73 billion in market value of companies including Wynn Macau Ltd. and SJM Holdings Ltd. last year.

 

“The VIP heyday is over,” said Philip Tulk, an analyst at Standard Chartered Plc in Hong Kong. “The anti-corruption crackdown doesn’t look to be a short-term phenomenon,” with funds flows between the mainland and Macau being much more closely scrutinized, he said.

Yes, there are concerns over corruption and embezzlement, which were capped when Macau implemented background checks for VIP gamblers, but a far bigger threat for Macau has been its abuse as a money-laundering mecca to which Beijing had turned a blind eye for many years but finally said enough. "Macau’s government has been curbing money flows to the territory over concern that illegal funds are being taken out of the mainland. It is restricting the use of China UnionPay Co.’s debit cards and its hand-held card swipers at casinos. Further clampdowns are expected with the help of banks."

To be sure, the crackdown on Macau "hot-money" meant that it was Las Vegas that emerged as a preferred money-laundering spot for Chinese billionaires. As we wrote previously, "as Macau has seen growth collapse, Las Vegas has seen Baccarat (the preferred game of China's rich) surge. In May, as Macau growth slumped, Las Vegas Baccarat surged over 85%. While slots (the staple indicator of the 99% in America) continues to decline (-4.4% in May), it seems rich foreigners are finding creative new ways to wash their money out of China.Macau had been the money-laundering center for Chinese elite: "You don't actually buy anything," said Lai, standing near a half-empty display case containing a messy spread of watches and jewellery. "We just help people get money out of China so they can gamble more."

And yet, subsequent to the brief burst in Las Vegas Baccarat revenues in the summer, this too money-laundering alternative appears to have fizzled out, suggesting there is more to it than merely a corruption crackdown and a halt to money-laundering.

That something is simple: as noted repeatedly on these pages, even as China's economy has been careening dangerously to a hard-landing, its stock market has soared over the past six months.

Why? Beuase in addition to the PBOC quietly launching both a lite version of QE in the summer and cutting rates in November, something far simpler happened: China's habitual - and filthy rich - gamblers decided to move from point A to point B, namely from the dark-lit Macau gambling parlors to multiple-monitor lit trading desks.

From Bloomberg:

While mainland regulators have eased regulations on investors using margin debt to buy shares, Macau’s government has tightened visa rules for Chinese visitors and cracked down on the use of UnionPay debit cards to bypass mainland currency controls. President Xi Jinping, who has spearheaded the anti-corruption campaign, is expected to visit Macau this month.

The bottom line:

"Customers who used to wager on casino tables are probably now sitting at home betting on stocks,” said Tai Hui, Hong Kong-based chief Asia market strategist at JPMorgan Asset Management. “Investors are levering up on margin trading, or ‘using a small knife to cut a large tree.’"

And there you have it: why gamble in a casino when one can gamble in the just as rigged stock market?

As for tumbling casino stocks, all Macau needs to do is wait for the Shanghai Composite to crash as the latest equity bubble pops, and all those gamblers who made the track from Point A to Point B hoping to get rich quick, rush back to where they came from.

That, or perhaps it is time for UBS to rent out its massive, world's-biggest, trading floor in Stamford to Wynn, or Sands or Galaxy or MGM. It's not like UBS uses it anyway.

Then again, probably not, because so much snarky commentary would be avoided if finally none other than Chinese billionaires were manning the trading terminals to the biggest rigged casino ever.