VISA RESTRICTIONS LIKELY TIED TO JUNKET UNDERCURRENT AS CHINA CONTROLS ‘WATER TAP

by Norman MacKillop, Macau Country Manager

In the bad old days of corruption in Hong Kong, locals would use the term mo soi, mo soi ! “Soi” means water in Cantonese, but in a slightly different tone it means “money” or “tax.” The pun referred to those unlucky enough to have to call the fire service. If no “soi” (money) was paid to the firemen, the “soi” (water) would not be turned on and the property would go up in flames.

Nowadays in Macau, when locals talk of China turning the soi on or off, they are referring to restrictions on Chinese citizens visiting Macau. They provide the soi for Macau’s casino-driven economy, which has seen phenomenal growth in a few short years. Before discussing the visa restrictions, it should be understood that Chinese citizens do not enjoy freedom of movement as citizens do in the Western world. There are even restrictions on where individuals can live and work — and a Chinese citizen can be an illegal immigrant in his own country. Exit visas are required to leave the country, with different rules applying to various countries, the reason for the visit and what job you hold (e.g. government servants are more strictly controlled).

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It should also be understood that tours organized by government-approved agencies are less strictly controlled, and the talk of visa restrictions in the context of Macau refers to the Individual Visit Scheme introduced by China in 2003 to boost the economies of Macau and Hong Kong, which were badly hit by the SARS crisis.

Initially, the visit scheme applied to citizens of certain cities with well developed economies in Guangdong Province bordering Macau and Hong Kong, and it has been gradually extended to cover 49 cities and counties as far north as Beijing. The scheme brought about an immediate increase in Mainland visitors to Macau.

Macau relies on Mainland China for 57 percent of visitors and about 40 percent of these arrive through the IVS.

Although the various cities in the scheme have their own restrictions, the biggest impact has been the restriction on neighboring Guangdong residents now being allowed to visit only once in three months compared to once every two weeks before June 1, 2008.

The loophole in visitors arriving from China via visas for Hong Kong has also been closed. Periodic restrictions over the past two years have proved to have little effect, other than brief falls in gaming stocks, which soon rallied after restrictions were lifted. (Current drastic drops in gaming stocks are mainly due to the world financial crisis.)

However, the latest negative turn of the water tap has resulted in a 24.6 percent year-on year decrease in visitors arriving via the IVS in September 2008. To put this in perspective, 2.3 million visitors arrived in September, a 2.1 percent increase over 2007. Not bad for a tiny territory with a resident population of 552,000.

On the revenue front, data from the Macau Gaming Inspection and Coordination Bureau showed that while 2008 third-quarter revenue rose by 27.9 percent, the pace of growth has slowed compared with the 54.6 percent increase between January and June.

Off icial government forecasts are that Macau’s GDP growth this year will drop from 15 percent to 10 percent. Put in the context of the current global financial crisis, these predictions are hardly reason for cries of anguish. Jefferies & Co. analyst s speculate that having achieved its objective in slowing down Macau’s growth, China will open the tap again some time in mid 2009, leading to a full year growth in 2009 of 11 percent.

There is a common mis concept ion that somehow a large chunk of Macau’s revenue finds it way into mainland government coffers. Not true.

Macau’s constitution (the Basic Law) allows Macau to keep all of its revenue. Why therefore would China want to slow down Macau’s economy? China never officially states reasons for visa restrictions and theories abound ranging from restricting the flow of proceeds of corruption to Macau’s casinos, collaborating with the Macau government to cool down the economy, lack of faith in Macau government due to a recent scandalous corruption trial involving a senior government official, anger with the American companies for siphoning profits over to the USA, or simply trying to control the massive illegal outflow of money to Macau.

The US companies in Macau have invested huge amounts of capital in the economy. It would be unfair to punish them for that. Against the backdrop of China’s anti-corruption drive and efforts to control economic growth, turning the tap on the illegal outflow of Chinese money may be a more compelling reason for the restrictions — in particular, when the majority of the money pours into the coffers of Macau’s junket operators.

As gaming operators invest billions into Macau’s economy and infrastructure, they are struggling to overcome the growing power of junket operators. The junket operators, sub junkets and their socalled collaborators are a hybrid of travel agent, money lenders and debt collectors, the most powerful of whom concentrate on bringing clients from Mainland China.

Junket-based patrons to Macau casinos currently account for 70 percent of the gaming revenue. Consequently, they have the power to exert strong influence on concessionaires through their ability to demand higher commissions and move their clients from one competing casino to another — and even on the government by the tax revenue they generate through VIP play.

Their capital investment in infrastructure and the development of Macau is minimal, but their return in investment far outstrips that of concessionaires. In typical VIP rooms, the casino is earning about 3 percent (an actual range 2.55 percent to 3.10 percent) of turnover and paying up to 1.25 percent (according to a recent agreement, brokered by an alarmed government between operators when competition pushed commission rates to 1.35 percent) of the 3 percent directly back to the junket operator.

The junket operator, in turn, gives rolling turnover to their sub-junkets at rates ranging from 0.50 perc ent to 1.25 per c ent . This leaves a very small margin for the casino to pay its 40 per cent government taxes, operating and other costs and leaves both junket and cas ino operator s vulne rable to s e ve r e losses through a large win. Indi vidual s can only take a maximum of RMB20,000 ($US250) without filing a customs declaration and residents can purchase foreign exchange at banks up to US$20,000 in a one-year period by presenting their identification documents and stating the purpose of the transaction. Larger amounts require stricter scrutiny.

A-Max Entertainment, a leading junket aggregator in Macau, boasted that it generated US$5.3 billion in rolling chip turnover in February and forecast that it would average US$6.3 billion per month in 2008.

Remember this is in only one casino in Macau (Melco/PBL’s Crown casino). A-Max operates by earning commission from the casino and luring subjunkets to their fold by offering credit deals and daily settlement of accounts, who in turn give credit to their sub junkets and so on down the feed chain. Count your own beans, but when you consider that the majority of the end clients are from China, the figures do not correlate with the aims of China’s currency restrictions.

The company expects profit for September 2008 will be about HK$220 million compared to a HK$51 million loss a year ago. A-Max also warns of a possible year-end loss due to the volatility of the junket market.

Another implication is that the junket operator’s gain is likely to come at the expense of the casino operator whose stock price has fallen rapidly. If China’s aim is to slow down this business, restricting exit visas does not seem to be having the desired effect in terms of the junket business.

However, China has a fine balancing act to perform. If the real goal is to lure Taiwanterritory of China. to the fold, Macau, like Hong Kong is an important model of success as a Special Administrative Region and sovereign

Regardless of whether or not the reasons for tinkering with visa controls are to protect their own economy or help Macau stabilize and diversify theirs, China will maintain this perception even at the expense of turning the water tap on to full flow. Heaven forbid, but perhaps the government should buy casino stocks in tandem with controlling the water tap.