On a recent night, the Venetian Macau, the world’s largest casino, looked like it was hitting the jackpot. Thousands of people were testing their luck. Thousands more were shopping and watching tourists ride gondolas inside the hotel resort, just a short ferry ride from Hong Kong.
But looks can be deceiving. The Venetian and other mega-casinos in Macau, a special administrative region of China, are being hammered. For more than a decade, they’ve depended on middleman “junket operators” to lure high rollers from mainland China to this former Portuguese colony.
Yet as is now clear, many of those elite gamblers were not independently wealthy. They were corrupt government officials, trying to beat the odds with pilfered public money. And since President Xi Jinping stepped up his campaign against official corruption this year – former security chief Zhou Yongkang was expelled from the Communist Party on Friday in the latest action – gambling revenues have dropped markedly in Macau for six months in a row.
The downturn has cut into the profits of some of the world’s biggest casino kingpins, including Sheldon Adelson, the CEO of the Las Vegas Sands Corp., which owns the Venetian Macau, and Steve Wynn, another Las Vegas billionaire with major casino investments in Macau.
“This is not just a ‘correction’ in the market. It is much more than that,” said Ben Lee, the managing partner at IGamiX, a Hong Kong gaming management and consulting company. “It is a real downward trend, and it is being driven by the anti-corruption campaign in China.”
The decline has stunned even the most bullish promoters of Macau. Gross gambling revenue fell 23.2 percent year over year in October, the largest year-to-year decline since Macau started releasing figures in 2005. November’s numbers, announced this week, showed a 19.6 percent decline in revenues from the same month last year to 24 billion Macau patacas, or roughly $3 billion U.S.
For the last eight months, such figures have helped knock down the stock prices of the world’s largest international casino companies. From early March to Dec. 1, Las Vegas Sands stock has lost 30 percent of its value, Wynn, 28.4 percent, and MGM Resorts International, 21.5 percent.
Beyond the impact on Wall Street, the revenue declines have revealed the quantity of pilfered Chinese-government money that moves through Macau, the world’s gambling capital. For comparison, Macau’s gambling revenues totaled about $45 billion last year; Las Vegas’ were about $6.2 billion.
“The actual revenues (in Macau) are probably six times that, because of the side betting that occurs in the casinos,” said Steve Vickers, a Hong Kong security consultant, while speaking in April to a conference at University of California, Berkeley. A former commander in the Royal Hong Kong Police force, Vickers added: “The scale of this in my career I’ve never seen before.”
Casinos took off in Macau in the 1950s, after the Portuguese granted Stanley Ho Hung Sun control of the territory’s gambling monopoly. A flamboyant entrepreneur who, at age 93, has 17 children from four wives, Ho spearheaded the “VIP junkets” that have become Macau’s business model.
Working through word-of-mouth and personal connections, junket operators provide mainland Chinese gamblers with ample credit, allowing them to avoid restrictions on currency leaving the country. Once in Macau, the casinos provide the VIPs with all kinds of perks, including private gambling parlors, lavish meals and other special “services,” namely prostitutes.
The junket industry mushroomed after 2002, when Beijing allowed international casino companies to invest in Macau, three years after China had taken control of the territory. There are now more than 30 casinos in Macau, the only region of China where Las Vegas-style gambling is allowed, and they’re major employers for the region’s 624,000 people.
Until the recent corruption crackdown, government officials and their families were the bedrock of the VIP business, and they didn’t come here just to gamble. Macau has long been a place where the Chinese elite could launder and transfer money overseas. Last year, a U.S. congressional report said $202 billion was laundered each year through Macau, based on estimates from a Macau academic.
While Macau officials have disputed those figures, methods of moving Chinese money through Macau are well known. A common one is for Chinese citizens to use their government-backed UnionPay debit cards to buy gold or diamonds in Macau jewelry stores. They then sell it back on the spot for hard currency, usually Hong Kong dollars, that can be easily transferred overseas.
According to a Reuters report this year, junket operators own some of Macau’s casino jewelry shops, giving them a cut of the action on transaction commissions.
In response to reports of money laundering, Macau has instituted several new restrictions this year, which may be contributing to the decline in Chinese high rollers. Bank transfer regulations are now tighter between Macau and mainland China, and junket operators are required to provide documentation on their clients and the sources of their cash.
McClatchy was unable to obtain comment from Sands, the first U.S. company to open a Macau casino and now the world’s largest gaming corporation. But at a trade show in Las Vegas in October, the 81-year-old Adelson said he wasn’t worried about Macau’s future fortunes.
“Everything is cyclical,” said Adelson, a major campaign contributor to conservative U.S. politicians. “It’s like gambling. Sometimes you’re up, sometimes you’re down.”
To make up for the loss in high rollers, some Macau resorts are diversifying, trying to attract non-Chinese tourists and those who want to do more than gamble.
On Nov. 22, Macau’s biggest event was Philippines boxer Manny Pacquiao successfully defending his World Boxing Organization welterweight title against New York native Chris Algieri. The fight at the Venetian drew thousands of Filipinos to Macau, and many spent the next day visiting the city’s historic churches and trying their luck at gaming tables.
Although similar in glitz and opulence, the atmosphere in a Macau casino is far different from that in Las Vegas. Chinese gamblers generally don’t drink while playing the tables, and their preferred card game is baccarat instead of poker.
Although they have a reputation for being somber gamblers, several Chinese could be seen tossing down their cards after being dealt losing hands.
Separate from the main casino floors are private VIP rooms. A McClatchy reporter took a peek into several on a recent weekend night, including those at the MGM, the Lisboa and the Grand Lisboa. All appeared to be largely empty, with service employees looking bored.
So far the drop in the VIP business hasn’t hammered the overall Macau economy, although the region’s gross domestic product dipped 2.3 percent in the third quarter, the first quarterly retraction in five year. Hotel occupancy rates have remained high, with rooms now more affordable for regular tourists, said Glenn McCartney, a tourism expert at the University of Macau.
But McCartney said the region had been slow to develop convention business and other alternatives to VIP gambling. He said the casino industry and investors would need to adjust to reduced returns after the recent boom years.
“There will be growth, but it will be much more realistic growth,” said McCartney. “It won’t be a 30 or 40 percent return for investors, but something more sustainable.”
For those investors with large bets on casino companies, a big question is whether China’s anti-corruption campaign is a temporary blow or the new reality. Even Las Vegas casinos have been affected, with the Nevada gaming commission reporting this month that baccarat revenues have dropped, most likely from a decline in high-end Chinese gamblers.
Harry C. Curtis, a New York-based gaming stock analyst with Nomura, a Japanese holding company, predicts that Macau’s casino revenues will recover.
Curtis said the government’s anti-corruption campaign had spooked the nouveau riche in China, not just government officials. “They don’t want to appear frivolous and spending money,” said Curtis, who recently visited Macau on a research trip. He thinks the high-end segment of the business will rebound in time.
Others are less bullish. James Chanos, who runs the Kynikos Associates hedge fund in New York, has been advising investors to stay away from Macau casinos, citing money laundering concerns. Chanos made his name by urging investors to “not go long” on investments in Enron before its infamous crash.
In April, Chanos caused a stir at a University of California-Berkeley conference when he said, “Although I was long (on) the U.S. casino operators, like Mr. Adelson and Mr. Wynn, I began to really get concerned about the risk I was taking with clients’ money under the Foreign Corrupt Practices Act.”
After those comments were widely reported, Wynn sued Chanos in San Francisco federal court in September. The lawsuit accuses Chanos of slander, although it doesn’t specify which comments provoked the legal action.
People who track the gambling industry’s fortunes will be watching a trip later this month by Xi, the Chinese president, to Macau. Over the last year, Xi’s anti-corruption campaign has surprised even the deepest skeptics, ensnaring hundreds of officials, including top leaders in the party and the People’s Liberation Army.
In his first visit here since heading the Communist Party, Xi will be attending ceremonies for the 15th anniversary of the Macau Special Administrative Region. Curtis hopes the president will make clear that China supports Macau’s gambling and tourism, even if Xi doesn’t want it to be a destination for misusing government money.
While Xi may do so, his trip will probably hurt, rather than help, Macau’s financial troubles, at least in the short term. With the president in town, few VIPs from the mainland will want to go near Macau’s casinos. Several Wall Street analysts expect December to be another disappointing month.