Chinese Currency Controls Create Criminal Casino Creditors

Macau’s day to day operations don’t just depend upon Chinese people wishing to gamble, but upon their ability to get money in and out of China, and that’s where the Junkets come in.

Macau’s gambling revenue in 2013 was up 20% on the previous year to around $45 billion. To put that in some sort of perspective Las Vegas would be lucky to manage around 15% of that and Atlantic City? Well the less said the better. Given the huge amounts of money involved it is unsurprising that the rise of Macau has had knock-on effects both within the region and further afield as the high-rollers go where the action is, but they’re fickle and recent events have driven them away.

Junket Operators – Macau’s Money Movers

• Tour companies that give credit abroad to Chinese citizens

• Tainted with criminal connotations and reputations

• High-rollers stay mobile betting crackdown on junkets won’t last

Does this then mean that the Macau bubble might burst? Is there a risk that the concentration of so much capital investment in one segment of the economy alone gives very little viable leeway in any circumstance in which there might be a short to medium term downturn in visitor numbers and profit margins? Certainly the example of Atlantic City would seem to indicate there is, but so close to a massive market like China is that really a worry?

With China being able to exercise tight control over the entry and exit of Chinese nationals to Macau the best description is “stranglehold” and in the past, for instance 2008, a clamp down on the numbers of Chinese allowed to visit Macau had an instant and detrimental effect on both turnover and profit margins within the province. Coupled with the effects of the world wide fiscal crisis at the time and the message was all too clear.

Without the goodwill and cooperation of China and indeed the continuation of Chinese gambling laws prohibiting gambling on the mainland, Macau would face extreme difficulties. The anti-corruption crackdown announced by President Xi Jinping has been said to have chased away authority-shy high-rollers unwilling to risk needing to discuss where their money came from, but worse it has scared off the less rich but still moderately well off Chinese from the mainland.

Travel And Credit Business Gets Around Fiscal Limits

The reasons for this are simple. The limited amount of money China will permit the average punter to take in and out of the country is woefully small, were one to strike it rich in a Macau casino there’s no way for the winnings to return home to China with you, nor could you bring enough to make a decent stab at it in the first place. This limit on fiscal freedom has led to the development of one of the greatest threats to the economic well-being of Macau; Money.

The Junkets are, very basically, tour operators who also provide financial services for those whose money is trapped behind China’s fiscal curtain. In basic terms credit is provided in Macau and payment can be made in Yuan within China proper. Unfortunately of course gambling debts are not legally enforceable in China which means those who refuse to pay are dealt with in more concrete terms than a legal liability law suit, operators gambling news of personal injury to those who default is good for prompt payment by other debtors.

This gangster-esque reputation has done nothing for the image of Junkets in either China or the rest of the world where the opportunities for money laundering are all too clear, and despite being a necessary function of the system China itself put in place limiting the movement of money, it is still officially frowned upon. Initially the western casino operators were unimpressed and wary of the Junket system which is perhaps quite ironic given their reasons.

Western gambling interests that had moved into Macau, and needed a good relationship with the Chinese authorities, were worried about doing business with the Junkets because of the criminal connotations and the gangster-connected history of the Junket operators. Given most of the western gambling establishments are run by people who also own casinos in Vegas, this is a laughably ironic case of the pot calling the kettle a kitchen dweller. Eventually they would lend to Junket operators as these trips brought in the high-rollers.

The Chinese Would Like To Take The Junket System And Junk It

Whilst the Junkets brings those who like to bet on sports in China to somewhere they can actually do so it is more traditionally Baccarat for which the Chinese travel to Macau. 91.3% of gaming revenue came from Baccarat in the first quarter of this year, with 63.4% of all revenue coming from VIP baccarat, that is to say, from Junket operations. This means that western casino owners can neither ignore nor live without this network of middlemen.

The Chinese would be more than happy to live without them and the crackdown by Xi Jinping may yet make inroads to curb their influence on the market, but this is deemed, by most industry watchers, to be unlikely in the long term. There is, to put it simply, too much money at stake. Far more money than was ever going to be on the table in say Las Vegas, and the comparisons are so stark as to be unquestionable. Take, for instance, per table winnings for casino operator Wynn Resorts.

Steve Wynn, the mahogany tanned millionaire whose company has just won the license to build a casino on the outskirts of Boston, has casinos in both Vegas and Macau, but the difference couldn’t be more obvious. The per-table-per-day win for Wynn in Las Vegas is $6,419, which is hardly chicken feed, and yet Wynn resorts gained a per-table-per-day win figure in Macau of $29,457. The scale of these de facto Chinese baccarat suites dwarfing the oasis in the desert.

The huge amounts of money that have made Macau such a success have also warped the place with only 1 in 10 dollars spent in Macau NOT spent on gambling (in Vegas it’s nearly 50%) and leave it vulnerable, the recent crackdown re-asserts Chinese control over the province, but until the junket system’s causes are dealt with there will always be a threat to Macau in the shape of how it makes its money, the fuel of its success could easily burn the place down.

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