It's Over For Macau, China's Latest Crackdown

[Music] what's up guys and welcome back to wall street millennial on this channel we cover everything related to stocks and investing over the past few years chinese president xi jinping has been cracking down on various sectors of the country's economy he is doing this both to support his common prosperity agenda and to increase the communist party's control they started by cracking down on real estate technology and private education industries more recently she has set his sights on the gambling city macau as a target for his next track down located on the southern coast of china macau is a special administrative region similar to hong kong you can think of macau as a las vegas of china gambling is illegal in mainland china but legal in macau because of this tens of millions of tourists from the mainland come to the city to gamble the massive amount of demand from these tourists has allowed macau to become the largest and wealthiest gambling hub in the world in 2019 the city generated 36 billion dollars in aggregate gambling revenue to put that into perspective it's roughly six times greater than las vegas the city's vast gambling wealth is divided across a relatively small population of 650 000 this has allowed their average income per capita to reach 86 000 in 2019 making them the richest city in china by far if macau were its own country it would be the third richest in the world after qatar and luxembourg the recently deceased macau casino mogul stanley ho had a net worth in excess of 10 billion dollars while the gambling magnates have been able to amass unbelievable fortunes over the past few decades it looks like their time may soon be coming to an end as you might guess the gambling and conspicuous consumption of macau doesn't sit well with president xi's common prosperity agenda especially when this wealth is mostly extracted from mainland chinese tourists in december of 2021 authorities arrested alvin cho who was one of macau's top gambling moguls on charges of illegally organizing cross-border gambling and online gambling operations he allegedly created an online bidding company in the philippines which catered towards mainland chinese residents as you might expect alvin's company sun city group has seen its share price more than cut in half since the criminal allegations were first reported and it is down more than 90 percent from its all-time highs it's not just sun city the share prices of all six major macau casino companies are down between 30 and 60 over the past year on fears that the government will continue its crackdowns and coveted related travel restrictions will continue to weigh on tourism in this video we'll look at how macau grew to be so wealthy why the chinese government is cracking down on them and what will be the future of the city back in the 1800s macau is occupied by portuguese colonists in an effort to raise revenue they legalized gambling and taxed it heavily throughout the 19th and 20th centuries the gambling industry grew steadily in the city making up an important part of the government's revenue in 1999 portugal transferred sovereignty of macau back to china after 150 years around the same time china was also opening up its borders and integrating with the rest of the world while technically part of china macau would be run as a special administrative region similar to hong kong that means that they have latitude to set their own rules and regulations importantly china continued to allow macau to run casino gambling which by this point made up the majority of the city's economy and government revenue this put macau in an extremely favorable situation gambling is completely illegal in mainland china if people there want to gamble the closest place to go is macau you can think of it as similar to las vegas vegas is in the middle of the desert and there's no particular reason a large city should form there the only reason it did is because gambling was legal and tourists from all over the country came there to gamble macau has a similar situation but the opportunity is even greater china's population is four times the size of the us and while there are a few other places like atlantic city in the us which allow gambling for chinese residents looking to gamble macau is the only game in town to operate a casino in macau you need a license from the government the government only grants six licenses to create an oligopoly currently the six licensed casinos are sjm wynn resorts las vegas sands galaxy entertainment group mgm mirage and melco win resorts las vegas sands and mgm are all american companies which set up offshoots in macau to take advantage of the growth opportunity macau taxes the casinos heavily and gambling related taxes make up 80 of government revenues as china became richer the opportunity for macau casinos to profit from high net worth chinese tourists increased as well some people would go to macau on their own just like how americans would go to vegas from time to time but if the casinos wanted to make real money they would need to be more proactive to this end casinos would hire contractors called junkets the junkets would go overseas to places like singapore hong kong and even mainland china and seek out high net worth individuals they would offer these clients vip treatment including arranging visa and travel plans giving them private vip rooms and providing financing and foreign exchange services you can think of the junkets as whale hunters a single rich client that they bring to macau could net the casino hundreds of thousands in profits which would be split up between the casino and the junket throughout the 2000s and early 2010s these whales were pivotal to macau's economic growth and they accounted for more than half of total gambling revenue at the peak at the pinnacle of the gambling industry was a so-called junket king alvin chao alvin founded a company called sun city group which was the largest junkie operator in macau controlling about 40 percent of the market they became so ubiquitous that almost every casino had a vip room specially made for sun city clients by the 2010s he was a billionaire and his personal affairs were widely reported by local celebrity gossip tabloids but as it turns out the sources of his vast wealth may not have all been strictly above board while chinese residents are allowed to travel to macau gambling is strictly prohibited within china the government views gambling as addictive and socially destructive which is probably true it is also illegal for macau-based junkets to send agents to mainland china to directly recruit vip clients apparently sun city was doing this anyway for many years but the mainland authorities turned a blind eye alvin allegedly started an online casino operation in the philippines how it works is they would live stream a poker game in the philippines online and mainland chinese residents could view it through an app the viewers from china could tell the operators which cards to play and bet real money the operators in the philippines were basically playing the game on behalf of the end customers in china so it's almost as if they are bringing a virtual casino to mainland china this was especially popular during the pandemic when travel restrictions prevented people from going to macau in person unfortunately this was completely illegal and alvin along with 10 of his co-conspirators were arrested this past december in the past many chinese authorities would turn a blind eye to a lot of these junkets coming in to recruit chinese vips but with this recent crackdown on the junkie king it looks like president xi is finally starting to crack down and given how he's been cracking down on other industries like real estate technology and private education gambling looks like another natural target for the common prosperity agenda there's no particular reason that macau should be as rich as it is they don't have any innovative technology or valuable natural resources their wealth is purely the result of gambling being legal there but illegal on the mainland it's almost like a zero-sum game between macau and china the only way that macau makes money is if chinese gamblers lose money additionally many wealthy chinese businessmen use macau casinos to bypass strict capital controls and launder their money into foreign currencies all six of the major macal casino operators have seen their share prices decline significantly over the past year and many observers are questioning the long-term viability of the macau gambling industry and this is all happening at the worst possible time for the city in 2020 their aggregate casino revenue declined by 79 percent as covet-related travel restrictions decimated tourism in 2021 this is expected to rebound back to 15 billion dollars but this is still less than half the pre-coveted level and with china facing problems with the highly infectious omicron variant recently 2022 might not be much better than 2021 even once the covet issue is completely resolved the junket rings that used to bring in the majority of casino revenue are likely gone for good the government wants mikael to diversify his economy to be less reliant on gaming they recently released a five-year plan designed to boost the city's technology finance and non-gambling tourist sectors however it's unclear if these will gain any traction there's no real reason to believe that macau will be successful at anything other than gambling as that's pretty much all they've done for the past hundred years they don't have the expertise to diversify into new industries there are fears that the government may force the casino operators to invest in non-gambling businesses as a condition to renew their gambling licenses this probably contributed to the share price declines as such investments would almost certainly be value destructive the rise and fall of macau shows how unstable their economic system was with covid their gdp was more than cut in half and is struggling to rebound and in the long term their economy is beholden to how far beijing decides to go with their junk gate crackdown while they can try to diversify into other industries their days of being the richest city in china are probably numbered alright guys that wraps it up for this video what do you think about china's gambling crackdown do you think macau will ever recover to pre-covet levels let us know in the comments section below as always thank you so much for watching and we'll see you in the next one wall street millennial signing out

Channel: Wall Street Millennial

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Length: 10min 2sec (602 seconds)

Published: Sun Feb 20 2022