The teetering Chinese economy and the ‘new normal’ for Macau casinos By Aaron Stanley September 17, 2015 at 9:46 am The plight of Macau’s gaming industry, the result of developments in mainland China, is well documented, but the saga is far from reaching a happy ending. While the primary scapegoat for the downfall has been a Chinese corruption crackdown, which has deterred VIPs and other big ticket baccarat players from visiting Macau, the increasingly shaky Chinese economy is the black swan that could completely sink the gaming hub’s prospects of a recovery. The confluence of events has lead to 15 consecutive losing months for Macau’s casinos. The island’s operators saw brutal double-digit losses for the second quarter, while the Macau’s annualized gross domestic product plummeted by 26 percent for the same period. The stunning change of fortune follows a decade of soaring growth that – paralleling the growth of the Chinese economy – made Macau one of the world’s hottest economies. , Now it is being forced to confront realities that other regions dominated by single industries are well familiar with. In the U.S., casino havens like Las Vegas and Atlantic City have faced increasing competition from gaming expansion in other states while a slumping economy dried up disposable consumer spending. No longer able to ride their respective casino gravy trains to infinite prosperity, both cities have had to adjust to new realities and implement broader and more diverse economic development strategies, to give patrons new reasons to visit and stay. With varying degrees of success, both cities have tried to rebrand themselves as broader tourism and entertainment destinations that offer visitors a full experience of concerts, conventions, clubs, dining, and other alternatives. Can Macau follow the same path? Yes, but not easily. Macau’s gaming industry is far more entrenched and critical to the city’s economic health than was the case with Atlantic City or Las Vegas in their respective heydays. Fitch Ratings estimates that non-gaming activities account for less than 10 percent of gross revenues at Macau resorts, compared to 63 percent for Las Vegas. And there are those who argue that Macau’s non-gaming amenities are irrelevant because visitors only come to gamble. There is no lack of motivation: the diversification message has been loud and clear, especially from the Chinese government, with even the enigmatic president Xi Jingping warning Macau last December of the folly of being overly reliant on the largesse of Chinese VIPs and tycoons. As Las Vegas and Atlantic City can attest, talking about the “D” word is a completely different ball game than achieving it. Macau still lacks much of the infrastructure needed to sustain a makeover into a tourism hub of global scale, though steps are being taken to rectify the problem. The city’s casino operators are spending big money on flashy new resorts that will offer new hotel rooms and convention space, a bridge is being built that will offer a direct connection to Hong Kong’s superior airport, and new non-gaming amenities are being brainstormed and unveiled. But while Macau is at least headed in the right direction towards broadening its economic base, the larger problem remains – namely that the purchasing power of its primary customer base is hemorrhaging before our eyes. The past month has seen Chinese stock markets plummet amid sour economic data releases, prompting an ad hoc intervention by the government, multiple devaluations of the Chinese yuan, and lingering fears globally that the entire Chinese economy – which has almost single-handedly driven global economic growth over the past decade – is teetering on the verge of collapse. Devaluing one’s currency is the oldest mercantilist trick in the book to boost exports and improve a slumping trade balance, since it makes the country’s goods and services cheaper relative to other currencies such as the dollar or euro. But a devaluation also has the effect of hurting domestic purchasing power vis-à-vis trading partners, meaning that those Chinese gamblers’ money is now worth less globally. Adding it all together makes for a troubling picture: fewer visitors from the Chinese mainland because of he corruption crackdown and other factors; visitors who do come having less money because of China’s economic woes; and the Chinese yuan buying significantly less than it did before (Macau’s currency is the pataca, not the yuan). These factors have caused many analysts to doubt whether Macau can recover at all, regardless of how well its endeavor to diversify pans out. Cameron McKnight, a gaming analyst with Wells Fargo, said in a note that he expects an eventual Macau recovery to be on the flatter end of the spectrum, adding that lower growth would be part of the “new normal” brought on by political and economic changes from the Chinese mainland. This “new normal” is neither the best nor the worst thing that could happen to Macau, but it marks yet another casualty in the ranks of countries that rode the Chinese prosperity train to their own respective economic booms. It also provides yet another indication that a casino business model built around a geographic monopoly is sure to bust eventually.