Dubbed as the “Las Vegas of Asia” owing to its lavish casinos, Macau is a peninsula city on the southern coast of China. Portugal ruled it before ceding it to China in 1999. Gambling was legal in Macau during the Portuguese rule, and continues to remain legal under Chinese control. It remains the only Chinese city where gambling is legal, and thus it attracts many international tourists, and local and international gamblers. The gambling business contributes almost 50% to the city revenues. (For more, see: Information and Advice on Macau and 3 Stocks for Gambling on Macau.)

The Development Of Macau’s Gambling Industry

The 1999 handover from Portugal to China saw a rapid rise in number of tourists, due to the removal of travel restrictions, making Macau a preferred tourist destination in the region.

From 1962 until 2002, the casinos in Macau had been under the monopoly of billionaire Stanley Ho, known as the father of Macau’s gambling industry. In 2002, the Chinese authorities opened the gambling markets, which led to Chinese and foreign businessmen entering the market. This liberalization was a crucial development that fuelled the gambling industry in Macau and established it as the gambling destination of the East. The premier casinos established during the first decade of this opening include Sands Macao, Wynn Macau, Venetian Macau, MGM Grand Macau, and Galaxy Cotai Megaresort.

Notable foreigners who established shops were primarily from the U.S., including Sheldon Adelson’s Las Vegas Sands Corporation (LVS), MGM Resorts International (MGM) and Wynn Resorts Limited (WYNN). All three U.S. casino operators have plans to build hotel-casinos on Macau’s Cotai Strip. The first will be Wynn Palace worth $4 billion, expected to be ready in early 2016.

In 2013, Macau’s gambling industry became seven times bigger than Las Vegas with gambling revenues of $45.2 billion, a 20% increase over previous year. Las Vegas revenues stood at $6.5 billion. In 2014, Macau maintained the lead with similar revenues, which were seven times more than Las Vegas’. However, 2015 is turning to be a bad year for Macau. There was a 37 percent decline in May revenues compared to same month last year.

The Client Profile

Macau gamblers can be categorized in two segments. First, there are the occasional rookies belonging to the tourist groups coming from all across the globe. They bet small chunks of money in casinos as a fun activity. The second are the high-stake professional gamblers who come from China, Hong Kong and nearby regions, and gamble regularly with large sums of money. These gamblers contribute the major portion of Macau’s gambling revenues, and are often called the VIPs.

How Gambling Works in Macau

Macau’s gambling structure is not like in Las Vegas. Macau is known to run on agent-based cartels, especially for the VIP category. Agents and promoters attract high net worth individuals from East Asia. They arrange dedicated gambling trips, often called as gambling junkets, with high-end accommodation and transport, which may even include a charter jet. Apart from commissions, the agents may even get a cut from the client’s losses in the casino. This model is common in the hospitality sector, but the situation gets trickier in Macau.

Chinese regulations impose a limit of $3,300 per visit on money that can be taken out of China, with a limit of $50,000 per year. Such rules limit the gambling capacity of patrons. Agents again come to their rescue by offering a credit facility to wealthy clients. Payments can be settled later, back in China. However, since gambling is illegal in China, recovery of such gambling debt is not legal. Hence, debt recovery from gambling clients in China may extend to illegal options, including violence and extortion.

This setup has led to a parallel stream of agent-cartels to flourish, as they facilitate everything from start to finish – attracting wealthy guests from China and Hong Kong to the final recovery of the dues. The end result is that an opaque economy flourishes in Macau and China, with no account of the exact amount of money being involved.

A report on Macau gaming industry published by The US-China Economic And Security Review Commission states that “the real value of Macau’s gaming industry is likely six times larger than the official reported size, making the actual market worth more than $200 billion” (as of 2013).

Such wealthy clients, sourced through and served by agents and junkets, gamble in dedicated VIP gaming rooms. These rooms are operated within the casinos, but remain outside of the casino’s official supervision. This is perfectly legal according to local Macau's laws. The same report states “In 2012, VIP baccarat rooms in Macau casinos accounted for 69.3 percent of total revenues.”

Why Gambling Revenues Are Declining?

Due to a lack of regulatory oversight of VIP room operations and no control over the junket operators, Macau casinos are vulnerable to money launderers. The Chinese government has recently stepped up operations to crack down on such illegal activities, which is the primary reason for the recent decline in gambling revenues.

Amid increased anti-corruption, anti-money laundering and regulations, many VIP gamblers have been forced to leave the scene, and agents are finding it difficult to attract clients and organize the gambling junkets, as they did in the past. A potential mandate by the government to completely ban smoking in Macau casinos could further make Macau an unattractive gambling destination. (For more, see: Will Macau Remain The Best Bet For Casino Investors.)

The Challenge of Varying Regulations

Most casinos native to Macau operate under Macau laws, which offer them great flexibility in running their operations. A few casinos owned by Chinese businesses are bound by the laws of both China and Macau, and the combination is stricter compared to that for native casinos. The foreign casinos, operating in Macau, are governed by laws of three regions. For example, U.S. casinos are subject to local Macau laws, Chinese laws and U.S. laws under the U.S. Foreign Corrupt Practices Act.

It is difficult to control activities when similar businesses operating in the same region have different rules to follow. Chinese authorities are attempting to streamline this structure, which should assist in greater regulation uniformity. 

The Bottom Line

The Chinese government is known to maintain a tight grip on its economy and money supply. The suspected illegal money laundering activities associated with the Macau gambling industry are expected to be contained in near future, with the ongoing efforts by Chinese authorities. However, China may then have to relax other restrictions currently in force, such as the restrictions on dollar limit per visit, to ensure that Macau gaming remains competitive and continues to earn revenue for the government.