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Money exchange could be critical to Macau casino resurgence

According to Muhammad Cohen, switching from Hong Kong dollars to Chinese yuan might alleviate official concerns about capital flight and make it easier for mainland visitors to travel.

The termination of China's 'zero-Covid' policy has lifted the gloom in Macau, but there is still a long path to recovery as mainland authorities oppose gambling and try to block foreign financial flow. One modest tweak might alleviate Beijing's fears about monies being illegally exited through Macau while also making it easier and less expensive for mainland Chinese tourists to visit the city.

Make no mistake: Macau gambling must evolve. The six casino concession holders lost more than $1 billion in the third quarter. That red ink flowed in the midst of zero-Covid, the collapse of junket promoters with two top executives imprisoned, and increased overseas gaming restrictions on mainland citizens, all before operators committed nearly US$15 billion to non-gaming development over the next decade, according to recent reports.

Fourth-quarter gaming revenue improved from the lows of the third quarter, but only reached 15% of 2019 levels. Corporate losses are expected to decline, and the end of zero-Covid has encouraged confidence for 2023. Even the bullish JP Morgan head of Asia gaming research, DS Kim, says it will take two years for gambling companies to rebalance their balance sheets after borrowing to stay afloat during the pandemic.

Kim anticipates "revenge gambling," as seen in earlier market reopenings, with the return of mainland and Hong Kong visitors, the latter barred since early 2020.

However, China's stricter stance on Macau casinos may have an impact on visitor morale. To keep casino operators on track, the new gaming law gives Macau's Beijing-approved chief executive the authority to terminate casino concessions in the name of national security. Instead of carrying on as usual, casinos must adapt to this new reality.

To open the door wide to mainland Chinese visitors with President Xi Jinping's government's support - or at least less static from it - Macau can accept mainland China's currency, the yuan, for gaming transactions by mainland players. The repercussions might be seismic.

Pataca celebration

When Macau became a Special Administrative Region of the People's Republic of China in December 1999, it retained the pataca, the currency under Portuguese control, just as its SAR predecessor Hong Kong did.

The internationally nonconvertible pataca (MOP) is linked to the Hong Kong dollar at 1.03 patacas per HK dollar, with the HK currency being fixed to the US dollar at a rate of 7.8 HK dollars to one US dollar.

Despite their marginally higher worth, HK dollars circulate freely in Macau and are accepted for cash payments on par with patacas. Most importantly, HK dollars are Macau's casino currency, swapped for chips at tables and cages with HK dollar table stakes and machines, with profits paid in HK dollars. A few casinos accept patacas bets, but Macau gaming floors are HK dollar territories.

China's renminbi, or yuan ("people's currency" in Mandarin), is under state scrutiny. Currently, one RMB is worth HKD1.15 and MOP1.18 (and 6.77 RMB per US dollar). Renminbi is not freely convertible on a global scale, however it is widely accepted in Macau.

Though it has never been declared officially, gaming experts believe Beijing would welcome renminbi play in Macau. The usage of RMB on gambling floors may necessitate legislation, but Macau politicians rarely oppose government plans.

The introduction of digital renminbi, which is currently being tested throughout China, would facilitate renminbi play in casinos. Digital renminbi, also known as Digital Currency Electronic Payment, Central Bank Digital Currency, and E-CNY, is not cryptocurrency; it is issued as mainland legal money by the People's Bank of China and, when linked to a specific PBoC account, is completely traceable by authorities. The goal of digital RMB is to replace tech firm payment systems like AliPay as the dominant payment method in mainland China.

Adopting digital RMB would alleviate what Beijing considers to be the most damaging financial side effect of Macau casinos: capital flight via unlawful fund transfers from the mainland.

National security threat

“Macau junkets and their symbiotic relationship with the casinos have long facilitated capital outflows from China, but such outflows are now, in the context of [China’s] current financial weakness, a virtual national security issue,” political and corporate risk consultant Steve Vickers says.

“The digital yuan will provide Beijing with a means to limit and control significant outflows into the Hong Kong dollar and US dollar.

“If the mainland authorities are really set on control, an obvious next step could be a ban on use of HKD in Macau’s casinos – in time. None of these developments will be good for the American investors in Macau’s casinos.”

However, challenges relating to digital RMB may be easier for casino stakeholders and patrons to handle than political measures aimed at restricting gambling.

“The ability to track fund movements will probably reduce opportunities of moving funds out through Macau’s casinos, but it would probably not eliminate opportunities altogether,” Vickers, CEO of Steve Vickers & Associates in Hong Kong, adds. “People are canny and will adapt. However, that will take time.”

IGamiX Management & Consulting managing partner Ben Lee has been talking about digital renminbi in Macau since 2020 and sees a switch bringing major benefits. Mainland authorities “can track who uses the E-CNY and can control the usage,” Lee says. “E-CNY will make it easier for mainlanders to use RMB [in Macau] without being ripped off.”

Therapy for conversion

"It is a strange cultural relic that Macau runs in a foreign currency to the great majority of its patrons," says Andy Choy, a longtime Macau casino executive. "Digital RMB has the potential to heal this almost universal ache."

In accordance with China's currency limitations, casinos exchange RMB for chips in limited numbers. The State Administration for Foreign Exchange (SAFE) limits cash travellers to RMB20,000 (US$2,906/€2,760) or foreign currency equivalent to US$5,000 per person each trip in China.

SAFE allows foreign ATM withdrawals equivalent to RMB10,000 daily within its comprehensive annual US$50,000 cap on overseas money transfers, limits enforced more stringently in recent years through facial recognition and prohibitions on using multiple cards.

A mass-market player can receive some casino activity and experience Macau's other attractions for RMB10,000 per day. However, RM10,000 only covers a few bets for a premium mass player.

Customers are on their own after those limits. "This has resulted in a significant cottage business that is mostly unmonitored and uncontrolled," adds Choy. "There are several reports of a general lack of transparency and inadequate consumer protection, with unscrupulous suppliers offering usury-rate credit."

Renminbi are frequently accepted at parity with Hong Kong dollars by Macau retailers. This amounts to a 10% fee for mainland shoppers, particularly for mass-market travellers, whom authorities are actively encouraging Macau to target.

Repairing technology

Ricardo Siu, a gaming expert at the University of Macau, believes that a digital renminbi policy may be implemented rather simply, even alongside other currencies on the gaming floor. "Technology can be useful," Siu argues. "With today's technology, casinos can easily record the quantity of chips purchased by a player in digital RMB.

"If a player wins, they may receive the digital RMB back, and for the winning amount, they should have the option of receiving cash or other types of deposit money."

The mainland authorities, on the other hand, do not want Chinese nationals using "alternative forms" of money in Macau that can easily migrate to offshore accounts. "E-CNY and HKD cannot cohabit. "Part of the difficulty is that the HKD is freely convertible," Lee argues. "In the initial phase, RMB will replace HKD in casinos before allowing casinos to transact in E-CNY."

Lee anticipates that RMB usage will bring Macau into China's monetary environment. The abolition of mainland limitations on cross-border cash transfers might be the jackpot for Macau, as there would no longer be a monetary border.

In principle, high rollers could play without limits with the digital RMB because their bankrolls would begin in China, and when they cashed out, their monies would remain in China, allowing Beijing to track the entire process.

It is questionable whether Beijing will accept this logic.

“I have seen nothing from mainland China leadership over the past year to suggest they are willing to relax any rule related to gaming and gaming related transactions [including] currency transfers into Macau,” former Macau integrated resort executive Kevin Clayton says.

“Relaxation of currency transfers into Macau could lead to higher levels of gaming and gaming spend by Chinese citizens, and this, in my opinion, will be unpalatable for China.”

'All you can eat'

Even with digital RMB play, Beijing officials would almost certainly impose limits, possibly without publicising them. As in the joke about the "all you can eat" restaurant, a guy ultimately comes to your table and says, "That's all you can eat."

"Requiring play in digital RMB may have the unintended consequence of driving [high-end] players and their money deeper into darkness, to other currency channels that are even more opaque and difficult to control, and perhaps worse, to casino venues or options that are not directly or indirectly under the PRC's ability to control at all," says Dean Macomber, an experienced casino executive in Macau, the Philippines, and North America.

"Requiring mainland Chinese to play in digital RMB may reduce the temptation for heavy and high-end gamers in the long run," Sui adds, adding that there is a silver lining. "This may lead IR operators to cultivate new consumer sources, like as east and southeast Asia," taking advantage of tax breaks for non-Chinese customers under the new gaming law while helping Macau achieve its policy goal of diversifying tourism.

"One of the huge unknowns in recovery will be China's stance on capital flow, particularly capital flow into Macau," says Vitaly Umansky, a longtime casino operator and industry observer.

"At this point, how liberal will the Chinese government be? It's tough to say since we don't know how much enforcement will take place until we see some form of normalised travel."

Umansky believes that discussing digital RMB in Macau is at best premature. "In China, digital RMB barely works. It is still at the pilot programme stage in a few areas of China, and it is a very, very limited programme. With all of the intricacies involved, suddenly expanding into Macau makes little sense."

Mandating the usage of RMB would also pose difficulties for casino operators. "If operators are collecting revenue in RMB, would all of their costs be in RMB?" Furthermore, Beijing would have control over operators' capacity to convert RMB and transfer it out of Macau.

"The assumption that Macau was a huge money laundering gateway has been enormously overstated," Umansky adds. There are other ways to transport money out of China that do not require passing through Macau."

Large transfers that were likely to worry mainland authorities were generally arranged by Macau junkets.

However, Umanksy claims that less than a third of Macau's 2019 gaming revenue comes from junkets, and he doubts that "the majority of that was tied to money [transfers]." Furthermore, under Macau's new, more stringent gambling laws, the role of junket promoters is significantly reduced.

Tolerance boundaries

“Not all illegal money transfers and/or capital flight via Macau gaming is created equal,” Macomber says. 

Authorities, according to Umansky, continue to accept the long-standing practise of using mainland credit or debit cards to purchase luxury products that are immediately returned for spending cash, a vital funding channel for high-end mass players.

"It would be a tremendous problem if the government said you couldn't do this anymore," Umansky says. "Say the government begins checking people at the border, searching bags for cash, [that would be a problem]... All of this, however, has nothing to do with digital RMB. There is no need for digital RMB to enforce any of this."

Umansky, who is located in Hong Kong, is still optimistic about Macau. "The Chinese client will always favour Macau," he argues, pointing out that mainland visitors can come without a passport, which many of them do not have. Umansky believes Macau's edge will last "as long as the Chinese government does not make it difficult to visit Macau."

At this point, he considers predicting mainland actions toward Macau gaming to be highly speculative.

However, Clayton reads the policy tea leaves clearly. “China’s acceptance of gaming in Macau is now complemented by a more hard line approach to product diversification, tighter controls over gaming operators, stricter cross-border monetary regulations and the ban on gaming promoters.”

Macau gaming will eventually pay the price for Beijing's embrace of the renminbi.



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