Gloom has eased in Macau with the end of China’s “zero-Covid” policy, but there’s a still a long road to recovery as mainland authorities oppose gambling and attempt to stem outward capital flow. One simple change could ease Beijing’s concerns about funds illicitly exiting via Macau while making it simpler and cheaper for mainland Chinese tourists to enjoy visiting the city.
Make no mistake, Macau gaming needs to change. Third quarter losses exceeded US$1bn for the six casino concession holders. That red ink flowed amid zero-Covid, the collapse of junket promoters with two leading executives jailed and increased overseas gaming restrictions on mainland citizens, and before operators committed nearly US$15 billion to non-gaming development over the next decade by latest reports.
Fourth quarter gaming revenue recovered from the depths of Q3, though still barely reached 15% of 2019 levels. Corporate losses will likely contract and the end of zero-Covid has prompted optimism for 2023. However, even bullish JP Morgan head of Asia gaming research DS Kim believes it could take two years for gaming operators to get their balance sheets back in order after borrowing to stay afloat during the pandemic.
With the return of mainland and Hong Kong visitors, the latter shut out since early 2020, Kim also expects “revenge gambling” as seen in other market reopenings.
But China’s tougher approach to Macau gaming may well weigh on visitor sentiment. Lest casino operators lose sight of who’s in charge, under the new gaming law, Macau’s Beijing-approved chief executive holds the power to revoke casino concessions in the name of national security. Casinos must adjust to that reality, rather than continue business as usual.
To swing the door open wide to mainland Chinese visitors with the blessing of president Xi Jinping’s government – or at least experiencing less static from it – Macau can adopt mainland China’s currency, the renminbi, for gaming transactions by mainland players. The impact could be seismic.
When Macau became a Special Administrative Region of the People’s Republic of China in December 1999, it retained the currency under its Portuguese administration, the pataca, just as its SAR predecessor Hong Kong kept its Hong Kong dollar.
The internationally nonconvertible pataca (MOP) is pegged to the HK dollar at 1.03 patacas per HK dollar, with the HK dollar itself pegged to the US dollar within a band around 7.8 HK dollars to one US dollar.
HK dollars circulate freely in Macau and are accepted for cash payments at par with patacas, despite HK dollars’ marginally higher value. Most importantly, HK dollars are Macau’s casino currency, exchanged for chips at tables and cages with table stakes and machines denominated in HK dollars, and winnings paid out in HK dollars. A few casinos also take bets in patacas, but Macau gaming floors are HK dollar domains.
China’s renminbi (“people’s currency” in Mandarin) or yuan, floats under state scrutiny. One RMB is currently worth HKD1.15 and MOP1.18 (and 6.77 RMB per US dollar). Renminbi is not freely convertible internationally although it is generally, but not freely, accepted in Macau.
Gaming experts believe Beijing would welcome renminbi play in Macau, although that’s never been stated publicly. Mandatory use of RMB on gaming floors could require legislation, but Macau lawmakers rarely reject government initiatives.
Introduction of digital renminbi, now in trials around China, would facilitate renminbi play in casinos. Digital renminbi, also called Digital Currency Electronic Payment, Central Bank Digital Currency and E-CNY, is not cryptocurrency; it is issued by the People’s Bank of China as mainland legal tender and, linked to a named PBoC account, is fully traceable by authorities. Digital RMB aims to supplant tech company systems such as AliPay as the prevalent payment method in mainland China.
Adopting digital RMB would mitigate what Beijing sees as the most harmful financial side effect of Macau casinos: capital flight through illegal funds transfers from the mainland.
National security risk
“Macau junkets and their symbiotic relationship with the casinos have long facilitated capital outflows from China, but such outflows are now, in the context of [China’s] current financial weakness, a virtual national security issue,” political and corporate risk consultant Steve Vickers says.
“The digital yuan will provide Beijing with a means to limit and control significant outflows into the Hong Kong dollar and US dollar.
“If the mainland authorities are really set on control, an obvious next step could be a ban on use of HKD in Macau’s casinos – in time. None of these developments will be good for the American investors in Macau’s casinos.”
That said, issues surrounding digital RMB could be simpler for casino stakeholders and customers to navigate than political measures aimed at limiting gambling.
“The ability to track fund movements will probably reduce opportunities of moving funds out through Macau’s casinos, but it would probably not eliminate opportunities altogether,” Vickers, CEO of Steve Vickers & Associates in Hong Kong, adds. “People are canny and will adapt. However, that will take time.”
IGamiX Management & Consulting managing partner Ben Lee has been talking about digital renminbi in Macau since 2020 and sees a switch bringing major benefits. Mainland authorities “can track who uses the E-CNY and can control the usage,” Lee says. “E-CNY will make it easier for mainlanders to use RMB [in Macau] without being ripped off.”
“It is a peculiar cultural artifact that Macau operates in a different currency to the vast majority of its patrons,” longtime Macau casino executive Andy Choy says. “Digital RMB has the potential to help alleviate this nearly universal pain point.”
Casinos exchange RMB for chips in limited quantities in line with China’s currency controls. China’s State Administration for Foreign Exchange (SAFE) restricts the cash that travellers can carry out to RMB20,000 (US$2,906/€2,760) or foreign currency equal to US$5,000 per person per trip.
Within its comprehensive annual US$50,000 ceiling on overseas money movements, SAFE allows overseas ATM withdrawals equivalent to RMB10,000 daily, limits enforced more stringently in recent years through facial recognition and restrictions on using multiple cards.
On RMB10,000 a day, a mass-market player can get some casino action and enjoy Macau’s other diversions. But RM10,000 barely covers a handful of bets for a premium mass player.
Beyond those limits, customers are on their own. “This has led to a sizeable cottage industry which goes largely unmonitored and unregulated,” Choy says. “Stories abound about a general lack of transparency and inadequate consumer protection, with unscrupulous providers offering credit at usury rates.”
Macau merchants usually accept renminbi at parity with HK dollars. That’s an effective 10% surcharge for mainland consumers, particularly impacting mass-market visitors, precisely the customers authorities increasingly encourage Macau to target.
University of Macau gaming expert Ricardo Siu thinks a digital renminbi policy can be implemented relatively smoothly, even with other currencies on the gaming floor. “Technology can help,” Siu says. “Under the current technology, it is not difficult for casinos to record the amount of chips purchased by a player through digital RMB.
“If a player wins, they may get back the digital RMB and, for the winning amount, they should have the right to choose to take the cash or other forms of deposit money.”
However, mainland authorities don’t want their citizens using “other forms” of money in Macau that can more easily migrate to offshore accounts. “E-CNY cannot coexist with HKD. HKD is freely convertible, and that is part of the problem,” Lee says. “RMB will replace HKD in casinos in the first phase before they allow the casinos to then transact in E-CNY.”
Lee expects RMB use will lead Macau into China’s monetary ecosystem. The jackpot for Macau could be elimination of mainland restrictions on cross-border currency transfers as, from a monetary standpoint, there would no longer be a border.
In theory, with the digital RMB, high rollers could play without restrictions since their bankrolls would originate in China and, when they cash out, their funds would remain in China, with Beijing able to track the entire process.
Whether Beijing will accept this logic remains unclear.
“I have seen nothing from mainland China leadership over the past year to suggest they are willing to relax any rule related to gaming and gaming related transactions [including] currency transfers into Macau,” former Macau integrated resort executive Kevin Clayton says.
“Relaxation of currency transfers into Macau could lead to higher levels of gaming and gaming spend by Chinese citizens and this, in my opinion, will be unpalatable for China.”
“All you can eat”
Even with digital RMB play, Beijing authorities would likely impose limits, perhaps without announcing them. As in the joke about the “all you can eat” restaurant, eventually a guy comes to your table and declares: “That’s all you can eat.”
“Requiring play in digital RMB could have the unintended consequence of driving [high-end] players and their money deeper into darkness, to other currency channels even more opaque and difficult to control and perhaps worse, to casino venues or options other than Macau and not directly or indirectly under the PRC’s ability to control at all,” Dean Macomber, an experienced casino executive in Macau, the Philippines and North America, says.
“Requiring mainland Chinese to play in digital RMB may lower the incentive for the heavy and high-end players in the long run,” Sui says, while noting a silver lining. “This may lead IR operators to cultivate new customer sources, such as east and southeast Asia,” cashing in on tax benefits for non-Chinese customer under the new gaming law while furthering Macau’s policy goal of diversifying tourism.
“One of the big unknowns to recovery is going to be China’s policy with respect to capital flow, particularly capital flow into Macau,” longtime casino executive and industry analyst Vitaly Umansky says.
“How liberal will the Chinese government be at this stage? It’s impossible to say because we don’t really know how much enforcement there is going to be until we actually see some sort of normalised travel.”
Umansky believes discussing digital RMB in Macau is, at the very least, premature. “Digital RMB barely works in China. It’s still in the pilot programme phase in a few parts of China, a very, very small programme. To suddenly be extended into Macau, with all the complexities involved, that doesn’t make a lot of sense.”
Mandating use of RMB would also present challenges for casino operators. “If operators are collecting their revenue in RMB, are all of their costs going to be in RMB?” Additionally, Beijing would control operators’ ability to convert RMB and transfer it out of Macau
More fundamentally, Umansky says, “The notion that Macau was a big money laundering channel has been massively overblown… There are plenty of ways you can move money out of China, you don’t need to go through Macau to do it.”
Macau junkets typically facilitated the large transfers that were most likely to concern mainland authorities.
But Umanksy notes less than a third of Macau’s 2019 gaming revenue came via junkets, doubting “a majority of that was related to money [transfers]”. Moreover, under Macau’s new, more restrictive gaming regulations, the role of junket promoters is greatly diminished.
Limits of tolerance
“Not all illegal money transfers and/or capital flight via Macau gaming is created equal,” Macomber says.
Umansky points out that authorities continue to tolerate the longstanding practice of using mainland credit or debit cards to purchase luxury goods that are immediately returned for spending cash, a key funding channel for high-end mass players.
“If the government came out and said you can’t do this anymore, that would be a big problem,” Umansky says. “Say the government starts stopping people at the border, going through bags and finding cash, [that would be a problem]… But none of this has anything to do with digital RMB. You don’t need digital RMB to enforce any of this stuff.”
Umansky, based in Hong Kong, remains bullish about Macau. “The Chinese customer is always going to prefer Macau,” he says, noting mainland visitors can enter without a passport, which many of them lack. Umansky expects Macau’s advantage will persist “as long as the Chinese government doesn’t make it bad to go to Macau”.
At this stage, he believes trying to predict mainland policies toward Macau gaming is highly speculative.
However, Clayton reads the policy tea leaves clearly. “China’s acceptance of gaming in Macau is now complemented by a more hard line approach to product diversification, tighter controls over gaming operators, stricter cross-border monetary regulations and the ban on gaming promoters.”
Sooner or later, Macau gaming will pay the price for Beijing’s acceptance in renminbi.