New measures to curb inflation in China could deprive high rollers of funding for Macau gambling trips
Will recent 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 that was posed directly by Union Gaming Research in a note to investors recently.
Chinese high rollers don’t—as far as Inside Asian Gaming is aware—normally drop in on their local bank manager to borrow cash in order to play 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 0% 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 VIP roll.
But there are at least two reasons why the tightening on Chinese bank lending policies announced by The People’s Bank of China 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.
In late January, Beijing released official figures on China’s gross domestic product (economic output net of imports) and also for consumer and producer inflation for the fourth quarter of 2009. All the indicators were heading up. GDP in China rose 10.7% year on year, while the consumer price index was up 1.9% and the producer price index (the average change over time in the selling prices received by domestic producers for their output) rose 1.7%.
High net worth people who borrow cash for gambling have to pay it back, and do so on occasion by liquidating assets. In a bubble, there is usually enough liquidity and confidence in asset markets to keep asset appreciation well ahead of inflationary pressures attempting to drag those values down.
The credit system used by the junkets may be outside the official banking system, but it responds to the same market mechanisms as the formal banking economy. If the asset bubble has some air taken out of it via controls on monetary and lending policy applied by a central bank, then the rate of appreciation of the value of a high rollers’ assets also diminishes. So, as a result, does the ability of the high roller to borrow escalating amounts of cash against 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 the gambling jurisdiction’s VIP segment is increasingly controlled by junket aggregators that raise their working capital via entities listed on 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 the RRR (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, though, when spread across the whole Mainland financial system. It is probably 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% hike) and maybe two could be on the cards. In 2007, China’s central bank raised the RRR nine times to curb inflationary pressures.
A senior gaming executive told Union Gaming research, however, that the main brake on VIP gambling credit looking beyond the remainder of the first quarter of 2010 was likely to be not the macroeconomic lever of the RRR, but the microeconomic one of debt collection default. The executive suggested so much credit had been issued to Chinese high rollers in the final quarter of 2009 and the first weeks of 2010 that some of it was highly likely to go bad.
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