When President Donald Trump initiated his trade and tariff war against China last year, the Chinese casino hub of Macau was one of the economic sectors caught in the crossfire. While it may be an autonomous territory under Chinese rule, the damage to its gambling economy is not going to hit the Chinese.
Who will be left standing?
Instead, it is American interests, including some very close to the President, who is potentially going to end up on the receiving end. Though the impact has not been catastrophic so far, if this trade war drags on any longer, especially beyond 2020, then US casino businesses with a stake in Macau are in for some serious trouble indeed.
How did an old Portuguese colony on the Chinese coast end up becoming a hub for American gambling businesses? We need to understand more about Macau to learn the implications of the US-China trade war here.
Macau - A gambling paradise bigger than Las Vegas
Macau, like Hong Kong, was a foreign colony until the late 1990s when its control was handed over to the Chinese. And like Hong Kong, it is not ruled directly by the Chinese government and is instead treated as a special autonomous zone.
Gambling was legalized during the Portuguese rule in 1962 and it quickly became the cornerstone of the Macau economy. One of the key reasons was the fact that casino gambling is illegal in China. So the Chinese gamblers arrive in droves each year to Macau.
After it became a Chinese territory, the gambling industry was liberalized, allowing for private investments from abroad. This resulted in massive economic growth over the next 20 years, making Macau one of the most lucrative gambling destinations in the world. With revenues exceeding $37.6 billion in 2018, Macau generated nearly four times as much cash as Las Vegas.
Among the foreign companies who rushed to bid for licenses in Macau in the early 2000s were some familiar names from Las Vegas - MGM, Wynn Resorts, and Las Vegas Sands. Together, they comprise half of the six operators who run the casino businesses in Macau.
Why the Chinese government might hit Macau?
The relations between Macau and its Chinese overlords are far from rosy in recent years. The mainland Chinese government is particularly concerned about black money flows into Macau from China. There have been repeated crackdowns against the casino industry in recent years, due to the high incidence of corruption involving local government officials in the territory.
Macau does not scream our communism
Now with the ongoing trade war, the Chinese government has been careful not to escalate the situation by taking any provocative steps so far. But they must surely be miffed about the fact that billions of dollars in revenue is heading from Chinese shores to the coffers of US casino owners, at a time when US tariffs are hurting the Chinese. The fact that one of them, Sheldon Adelson, happens to be a close ally and donor to President Trump would certainly have aroused the interest of the Chinese.
Adelson's Las Vegas Sands group has six casinos in that region, in Macau and Singapore. Together, they constitute one of the biggest revenue streams for his company. Any disruption in the Macau gambling business would have a heavy impact on him, and indirectly on Trump as well.
Ways US interests in Macau can be hit
Should they choose to do so, Beijing has several options on its hands to make things uncomfortable for US-owned casinos in Macau. The corruption crackdown since 2014 has already had a cooling impact on the casino operations there. The Chinese can take it to the next level with increased policing and harassment of these casinos. This has the potential to drive away VIP high rollers, who are the main sources of income for the casinos there.
There is also another very unique option available to the Chinese Government. It involves the millions of Chinese tourists who go abroad each year on vacations. In Southeast Asia, Chinese tourists have a massive impact on the local tourism industries of many countries.
The government has been using this to leverage its power, encouraging the Chinese to go to countries which align with China, while at the same time discouraging tourists from visiting countries that go against Chinese interests. South Korea learned this the hard way when China blocked group tours to the country over a US missile base issue.
China could easily use the same tactic to strain the Macau gambling scene since a huge chunk of its income comes from Chinese tourists who flock there in the millions each year to have fun and gamble at the casinos.
If the trade war stretches into the next year, things would get a lot trickier for the US casino companies. They operate in Macau on the basis of short term licenses that last 5-6 years. The existing licenses are set to run out starting in 2020. If the Chinese get really angry at the US by then, they can put a real squeeze on American casino owners by refusing to renew those licenses.
The impact so far and future prospects
The current impact of the trade war on the Macau casinos has been relatively minimal. They have experienced a fall in revenues, but not all of it is directly due to the tariffs. There are reports that new generation Chinese tourists are less interested in gambling, and more focused on experiencing local culture and cuisine. These days, a growing number of casino enthusiasts would rather play online than take a trip to a distant casino destination. The bonuses are also much more appealing with many casinos offering free no deposit cash or free spins.
The Chinese economy has experienced a slowdown in recent years, reducing the spending power of Chinese gamblers in the process. This has also had a negative impact. The official crackdown over the last couple of years on black money and corruption has also played a part.
But on the whole, the outlook is still not too bleak for Macau's casinos. There are indications that the US-China trade war is headed for negotiations. With elections looming on the horizon, the US President might be keen to reduce the damaging effects of the trade war on his voters. Recent news reports indicate that both parties are headed to the negotiating table. 2019 might turn out to be a good year for casinos in Macau after all.
