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Macau’s corruption battle

Macau has grown to become one of the leading gambling destinations in the world. However, China’s anti-corruption drive has led to a steep revenue decline

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A view of Macau and its many casinos. The island has been suffering as a result of China's recent anti-corruption drive 

Las Vegas is generally seen as the global capital of the gambling industry. At a push, Monte Carlo could also contend for that title, while old favourites such as Atlantic City also hold a place on the list of the world’s historic gambling centres. In recent years, however, the Chinese island of Macau has gained increasing prominence. Up until 2013, Macau was regularly touted as the new centre of the global gaming industry, with a CNN article from that year noting: “Macau has cemented its status as the undisputed heavyweight champion of the gambling industry.” According to the article, Macau’s casino revenue in 2013 was $45bn, up by nearly 20 percent from 2012. Las Vegas, by contrast, pulled in around $6.2bn in 2012, according to The Las Vegas Review-Journal. Since the island was opened up to foreign casinos in 2002, Macau has seen its total number of operating casinos surge, alongside visitor and revenue totals. This growth, however, is now under threat.

In The Communist Manifesto – a text with which Macau’s far-off rulers in Beijing should be familiar – Karl Marx noted, in reference to economic life under capitalism: “All that is solid melts into air.” Similarly, Macau’s supposedly undisputed heavyweight champion position in the world gambling industry may too be melting into air: since 2014, the revenue accrued by the Macau gaming industry has tumbled, although the island continues to maintain its top position in terms of status and income. In January 2016, the total revenue of the island’s casinos for the previous year were reported by Macau’s Gaming Inspection and Coordination Bureau to be down by 34.3 percent. This has left Macau’s gaming industry revenue at a five-year low of $28.92bn.

For many corrupt party officials and businessmen in China, Macau was the place to either wash dirty cash, or frivolously gamble it away

This was a second year of losses for Macau, and represents an end to the winning streak the island had enjoyed since the 2002 liberalisation. According to The Sydney Morning Herald: “Macau casino operators have had more than $130bn wiped off their market value in the last two years.”

By contrast, Nevada as a whole saw its actual revenue increase – albeit marginally – by 0.9 percent to $11.1bn in 2015. However, Las Vegas itself saw a 0.4 percent dip in revenue, leaving it with a revenue total of $6.348bn. While these figures suggest takings are far from lacklustre, the original Sin City – which as recently as two years ago was being touted as being eclipsed by the East – has maintained its revenues at a fairly steady level, while Macau has seen its own numbers plummet. The Chinese island now seems to be in serious trouble, and its long march to global gaming dominance has been halted, for now.

Corrupt cadres
A number of reasons have been cited for the slowdown in Macau, but, alongside a general decline in economic growth in China, the key reason is the mainland-led crackdown on corruption within the Chinese Communist Party (CCP) and associated business figures.

Corrupt officials have existed within the party since the founding of the People’s Republic of China – and indeed, long before. However, the prevalence of corruption has a shorter history: as The New York Times noted in 2014, party members “have been stealing more since the early 1990s, thanks partly to a large increase in infrastructure spending. Lucrative contracts for roads, ports and railways are opportunities for them to enrich themselves or their cronies. Investment in infrastructure, real estate and other fixed assets rose from an average of 36 percent of GDP during 1980-91 to more than 41 percent during 1992-2011”.

Successive administrations have been aware of this problem and have attempted to address it. According to Daniel A Bell, author of the book The China Model: “Former President Hu Jintao warned that corruption ‘could prove fatal to the party, and even cause the collapse of the party and the fall of the state’, and his predecessor Jiang Zemin said that ‘corruption is the cancer in the body of the party and the state. If we let it be, our party, our political power and our socialist modernisation cause will be doomed’.” However, very little was done to stamp down on these issues until current President Xi Jinping launched his far-reaching anti-corruption campaign in 2013. This initiative has vigorously pursued corruption within the party, and Macau has heavily felt
the results.

Macau Tower at night
Macau Tower at night

Tackling issues from the top
For many corrupt party officials and businessmen in China, Macau was the place to either wash dirty cash, or frivolously gamble it away. However, in the face of the recent anti-corruption drive, their ranks are now depleting.

As a US cable released by Wikileaks noted in 2009: “Massive flows of money and relatively weak controls over financial transactions make Macau a target for those seeking to launder illicit funds.” While noting that a number of illicit funds from around the world regularly make their way into the island’s gaming industry, the message went on to note that mainland China’s gamblers “account for a large share of the lucrative VIP gaming market, betting literally billions of dollars despite Chinese Government-imposed capital controls that restrict Chinese residents to taking just a mere $50,000 worth of currency out of China each year”. This primarily takes place through what are termed ‘junket operators’, through which access to private VIP gambling rooms is facilitated.

On the surface, attempts to crack down on corruption and ostentatious lifestyles among state officials may not be able to impact the fortunes of Macau; a small island with a GDP per capita that ranks alongside Norway’s and among the top five in the word. However, with the number of party members who are potentially corrupt – ranging from President Xi’s tigers down to the flies – growing alongside those in the party who had previously flaunted their great wealth, the concept becomes much more plausible.

The CCP is one of the largest institutions in the world, and until 2015 was the largest political party globally. India’s Bharatiya Janata Party (BJP) eclipsed the CCP in terms of size that year, although the CCP still maintains nearly 88 million members. At the same time, the CCP is the official state party (and in practice, the only ‘real’ party in the country), with key institutional and civil servant roles requiring membership, as opposed to the BJP, which exists within a multiparty democratic system and so is not as firmly wedded to the state.

This has given rise to a large pool of Chinese party members in key state functions – locally or otherwise – within which corruption can readily be found. In 2015, 300,000 officials were charged and punished for corruption, with 200,000 of those found guilty receiving ‘light’ punishment. Some 82,000 others were afforded severe penalties. Included among these were 100 of the once-untouchable elite of the party – the so-called tigers – according to International Policy Digest. Officials from almost every province, from top ranking to lowly civil servants, have found themselves cornered by the campaign.

The Chinese Government has repeatedly stated its policies are now geared towards raising the living standards of Chinese people. A corrupt state has the potential to disrupt this

These numbers are staggering in and of themselves. However, in addition to this mass of people who have been removed from positions that once afforded them access to illicit funds are various family members and acquaintances who will also likely have benefited from corruption through a benevolent sharing of the spoils of power.

Seemingly, these numbers are only a drop in the ocean compared to the party’s 88 million other members. However, if only 10 percent of the party is corrupt (or at least drawing out money in illicit ways), that still totals 8.8 million corrupt communist cadres. If one were to add to this the spouse of each such member, that number reaches nearly 18 million. If one child per member plus an additional acquaintance or family member were also added, that number reaches 34.6 million – the population of a reasonably sized country.

Macau for the middle classes
As the threat of a purge by the state continues, this huge pool is more likely to call an end to – or at least cut back on – the acquisition, spending or washing of funds they have illegally acquired from their roles. Considering that politicians are already reported to be delaying legitimate economic projects for fear of falling foul of the drive, the decision of many officials to stay away from Macau’s casinos (which they are officially banned from entering) is not so hard to understand. Furthermore, the attempt by the party to enforce members to live a more austere lifestyle is encouraging seemingly non-corrupt party members (and, again, their codependents) to further reduce the amount being spent on luxuries – including high-stakes games in Macau.

Already the effects of this have been felt around the world, with European luxury brands reporting declining sales in 2015, and blaming – in part – a decline in transactions from CCP members. Luxury items produced within China have also taken a hit. As The Economist noted last year: “Since 2013, the anti-corruption campaign of Xi Jinping, China’s president, has made conspicuous consumption politically suspect and reined in the practice of lavishing gifts on officials.”

Yet, to simply view Macau’s declining revenue as some sort of demise would be a mistake: the island acquired its position as a top destination for high-rolling gamblers both from within and outside the CCP in the period of time between China (and an elite few Chinese) becoming wealthy and proper governance being instated. The splurge of investment spending, relentless economic development and privatisation of industry – which began in 1992, when Deng Xiaoping defied until-then conventional party wisdom by telling his countrymen that “to get rich is glorious” – created a China awash with cash. However, members of state did not have the necessary oversight to ensure those getting rich were not doing so illicitly. For this reason, following its opening up to the rest of the world, Macau and the revenues it pulled in became inflated beyond any reasonable measure.

The dome of Grand Lisboa, a 47-floor hotel and casino in Macau
The dome of Grand Lisboa, a 47-floor hotel and casino in Macau

However, this corruption-fuelled bubble is now being deflated. From Atlantic City to Las Vegas, many gambling-friendly regions – having initially operated as a playground of criminality for corrupt members of both the private and public sector, and those who operate in between – have, amid a sea of prohibition, begun to clean up their operations.

Macau is now tidying up, too: as the China-focused news website The Shanghaiist has noted, many Macau casinos are already “building new attractions which will target the mass market, appealing to tourists and families rather than the high rollers who look less likely to be contributing to the city’s economy in the near future”.

Macau may not return to its former glory any time soon, but if that status were to come at the expense of an attempt to rid Chinese politics of the corruption that has come to engulf it, the island should not aim to do so. A less corrupt state is a better functioning state, and a better functioning state is key to economic development.

China has experienced impressive economic development in the past few decades. However, at its present point of growth, it must look towards fostering an internal market – the state must back away from the extensive growth model it has enjoyed so far and move towards an intensive one, if it is to avoid the so-called middle income trap. Indeed, the Chinese Government has repeatedly stated its policies are now geared towards raising the living standards of Chinese people. A corrupt state has the potential to disrupt this.

If China manages to achieve its goal of fostering wider prosperity, the result may be a rising number of middle-class Chinese wishing to vacation in Macau, just as middle-class Americans did in Atlantic City and Las Vegas. However, key to this is the fact that China – despite its residents’ supposed love of gambling – still bans gaming on the mainland. As a result, Macau will hopefully become the holiday destination of an increasingly wealthy middle class, rather than the playground of the super rich it has been until now.

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