Will this week’s changes to China’s macroeconomic policies on bank lending mean a tightening of credit supply to the Macau VIP gaming market?
It’s an interesting question and one posed directly by Union Gaming Research in a note to investors.
Chinese high rollers don’t—as far as Asian Gaming Intelligence is aware—normally drop in on their local bank manager to take a direct loan to play on the tables (though goodness knows it’s probably happened before now under the guise of a ‘business loan’).
No, value-conscious Chinese VIPs get someone else to pay for their gambling credit up front and then pay the lender back for any losses. It’s not quite nought percent finance (the agents get to keep a percentage of the roll by locking the player into non-negotiable chips), but it’s the next best thing. That’s, in essence, the VIP agent system that is the backbone of Asian casino roll.
But there are at least two reasons why the tightening on Chinese bank lending policies announced by The People’s Bank of China this week could have an impact on the Chinese VIP gambling trade in particular, and the Macau market in general. The first is that Beijing’s policy appears designed to help deflate asset price bubbles that seem to be forming in Chinese equity and property markets.
High net worth people who borrow cash for gambling have to pay that back and do so, on occasion, by liquidating assets. If the rate of appreciation of the value of their assets diminishes, then so does the ability of the high roller to borrow escalating amounts of cash against those assets in order to pay for VIP baccarat in Macau.
The second reason for the potential efficacy of lending policy changes in cooling down Macau is that increasingly the gambling jurisdiction’s VIP segment is controlled by junket aggregators that raise their working capital via entities listed in the Hong Kong stock exchange. Any cooling of China’s equity markets could also cool investment in those listed vehicles, thus reducing the flow of working capital to the junkets.
Union Gaming points out that the 0.5% increase in RRR, the reserve requirement ratio (i.e., the minimum reserves each bank must hold to cover customer deposits and notes) imposed on China’s lending institutions by the central bank, will remove only around US$29 billion of liquidity from the Chinese economy. This is small beer when spread across the whole Mainland financial system. It is probably, however, being used by Beijing as a range finding exercise in the battle to cool the asset bubbles. If it doesn’t work, more of the same may be on the way during 2010. Some analysts think at least one more 50 basis point rise (i.e., 0.5 percent hike), and maybe two, could be on the cards. In 2007, China’s central bank raised the RRR nine times to curb inflationary pressures.
And if all that doesn’t dampen the ardour of Chinese baccarat players in Macau, there’s always the tried and tested favourite of visa restrictions. With Macau’s gross gaming revenue (two thirds made up of VIP baccarat sales) growing 59 percent and 48 percent year-on-year respectively in November and December last year, more visa curbs look highly likely.
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