VIP gamblers in China: A bait and switch? By Ken Adams, CDC Gaming Reports January 11, 2021 at 1:00 am China is changing, being changed. President Xi Jinping is engineering a stronger central government and decreasing the importance of a free capitalist economy. Although a semi-capitalistic economy exists, it is coming more and more under the central control of the Communist Party. The changes will be important to any company wishing to do business in China, but none more so than casinos in Macau. The National People’s Congress has just passed an amendment to its criminal code; the new code criminalizes organizing or recruiting Chinese citizens to gamble in other countries or to cross a border to gamble. The cross-border concept is much like America’s interstate-commerce regulation by the federal government. The concept is critical to Macau, as there is a border between China and Macau; Macau is designated as a Special Administrative Region of China and part of China. But for the purposes of this law, Macau is across the border. The Macau skyline, via Shutterstock The new law has implications for other countries as well, including Vietnam, Korea, Cambodia, the Philippines, Malaysia, and Australia. For example, Crown Resorts has just opened a new resort in Sydney. Currently, the casino is not open, due to regulatory concerns that arose from Crown’s junket activities in China and questionable money-handling procedures; Crown is awaiting licensure for its casino. The resort was conceived before the issues with China surfaced and designed specifically to cater to rich Asian gamblers — that is, Chinese VIPs. It is already being argued in the Australian press that the property is destined to fail because the Chinese high-roller business model is now fatally flawed. The majority of casinos in Asia were built to attract the same gamblers. Unfortunately, the Chinese VIP junket world will probably be disabled by the Chinese legislation; there is a high probability that high-rolling Chinese gamblers will become an endangered species. The new law will probably affect two separate categories of participants in the VIP gambling world: the junketeer and the individual gambler. The junket organizers are the immediate target and anyone caught soliciting Chinese citizens for the purpose of gambling is subject to a minimum of five years in prison. Anyone, whether Chinese, Australian, or from Macau, in China organizing junkets or recruiting Chinese gamblers is automatically guilty of a crime. However, there is an even bigger implication for the individual gambler. Gamblers who go to other countries or cross borders to gamble are probably taking the same risk as the junket representatives. China has instituted a system of social credit scoring much like our financial credit scores. Officially, China is striving for social harmony, a land where every person acts in socially appropriate and harmonious ways. Citizens have been given a baseline score; good governmentally approved behavior is rewarded by points, while bad unapproved behavior receives a penalty in the form of negative points. The scores are grouped into four categories, A, B, C, and D. A is the privileged class, given preferences for healthcare, jobs, schooling, and other societal rewards. B and C are remedial categories in which people are encouraged to avoid improper behavior and engage more often in good social citizenship, such as volunteering for public works, reporting misbehavior by others, and donating organs. D is a near-criminal category that can result in job loss and denial of access to educational services and travel facilities. There are no figures on job loss, loans denied, or schools not attended. However, as of June 2019, as a result of social credit scores, more than 30 million people had been denied travel privileges in China. The list of anti-social or irresponsible behavior covers a wide range of activities: jaywalking, googling questionable terms, saying the wrong thing in a text to a friend and gossiping, dishonest and fraudulent financial behavior, playing loud music, eating in rapid transits, violating traffic rules, making reservations at restaurants and not showing up, disposing of trash incorrectly, and, most probably, gambling. Except for approved lotteries, gambling in China is illegal; in that context, it may be construed under the new law as being antisocial and subject to punishment. In a country with 1.4 billion people, a system of rewards and punishments based on personal behavior might be difficult to administer. However, this is the 21st century, the century of extremely sophisticated technical know-how. With current technology, including sophisticated artificial intelligence software, the Chinese government can track anyone. It is estimated that China has installed as many as 600 million video cameras. The government can identify any single individual of the 1.4 billion citizens within seconds. Additionally, nearly every person in China has WeChat on their phones. With WeChat, everything they do or say is monitored by the central system. Gamblers are warned: You cannot sneak across the borders any more to gamble. And when you’re caught, you can expect to spend at least five years in prison. If the government does apply the law to both gamblers and junketeers, it is a game-changer for Macau. In 2016, President Xi started a campaign against corruption in business and the Communist Party. In two months, that campaign had stopped the flow of VIP gamblers to Macau in its tracks. Revenues dropped by over 50 percent. Within a couple of years, that campaign had played itself out and things were returning to normal in Macau in 2019. But the pandemic has been even worse for the city than the crackdown. Gaming revenues for 2020 were down 80 percent from 2019. Analysts differ on the potential post-pandemic recovery period for Macau, but estimates range from 2 to 5 or more years. Those estimates were made before the new law was published. A pessimist might update those estimates — from a century to never. Interestingly, in 2022, the casino licenses in Macau come up for review and renewal. For the last three years, casinos have been investing billions in the city. The investments were of course meant to capture more revenue, but also to prove the worth of the licensee to the governments of Macau and China. It is too soon to speculate, but that money might have been wasted. One major investor in MGM has published a letter urging the company to sell part of its stake in Macau. As the implications of the new law play out over the course of 2021, there are certain to be many reassessments of the value of a casino license in Macau. The casino companies were lured into Macau with the promise of the world’s largest gambling customer base, Mainland China. A casino license in Macau appeared to be a license to print money. It now seems that China may have withdrawn the bait and switched it. China wants international travelers in Macau, not gambling Chinese. They were just the bait to get the billions of dollars in investment.