Macau economy undergoing great reconstruction

October 17, 2015 08:00
Macau's excessive dependence on the gaming industry has prompted the local government and various parties to review the progress of the city’s economic diversification. Photo: Bloomberg

Over the last decade, Macau’s gaming sector posted strong growth, which was mainly driven by revenue generated by VIP rooms rather than mass gaming. VIP rooms contributed more than 70 percent of the total gaming revenue.

In 2013, Macau’s gambling revenue reached 30 billion patacas (US$3.76 billion) per month, of which VIP rooms generated 21 billion patacas while mass gaming and other segments contributed 9 billion patacas.

The gaming sector started to slide in the second half of last year. In 2014, the city’s gross gaming revenue reached 351.5 billion patacas, of which VIP rooms contributed 60 percent.

The monthly gambling income dropped 17 percent to 25 billion patacas during the period. The income from VIP rooms fell 29 percent to 15 billion patacas per month, while that from mass gaming rose 11 percent to 10 billion patacas.

The dwindling income from VIP rooms is the main reason behind the city’s sliding gaming revenue over the past year. This fall was largely due to China’s anti-corruption fight and the restricted use of China UnionPay Co. debit cards at casinos.

The astonishing growth of Macau’s gaming sector over the last decade has a considerable element of illegal money flows into the world’s largest casino hub. These illegal money flows turned the city into a black hole for mainland corruption and money laundering. Massive wealth vanished like a bubble.

Also, Macau has increasingly felt the impact of limited land and other resources amid the rapid growth over the last decade.

As a result, prices kept increasing to a level that is unaffordable for the majority of residents.

The dominant gaming sector has provided an unbalanced economic growth model. From the perspective of economics, gambling is a supply-driven industry, with an internal drive for infinite expansion without demand and industry restrictions.

However, the gaming industry needs land, labor and other resources, whose supply is limited.

The impulse for infinite expansion, which is inherent in the gaming sector, is contradicted by the limited supply of various resources.

That has led to economic imbalances and unsustainable growth. As such, the city's economic slowdown should be viewed as a warning.

The excessive dependence on the gambling industry has already prompted the local government and various parties to review the progress of the city’s economic diversification.

It’s not an easy journey going forward, although various stakeholders have been calling for economic diversification.

As they say, you will never know who's swimming naked until the tide goes out.

Currently, Macau is facing its toughest economic slowdown. It's a good time for all parties to decide what direction, approach and strategy to take to pursue economic diversification.

The Macau government is making a review of the city’s gaming sector, and hopes to introduce a new growth model that includes both gaming and non-gaming industries.

Hopefully, that would pave the way for the city to enter a new period of rapid and sustainable growth.

This article appeared in the Hong Kong Economic Journal on Oct. 12.

Translation by Julie Zhu

[Chinese version中文版]

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Professor at South China Business College, Guangdong University of Foreign Studies