The Financial Times, among others, ran stories yesterday attributing the sharp, across the board fall in Macau casino shares in Hong Kong Tuesday to the detention by Chinese authorities of several junket operators who organize groups of high roller gamblers travelling from the mainland to the SAR to gamble. Government inquiries have apparently also been made to the casinos themselves for information about the structure and betting behavior of some junkets.
To my mind, it’s not yet clear what’s going on. The possible government concerns, as I see them, might be:
–displays of affluence in a socialist economy. This has never bothered Beijing before, so I doubt this is the issue now, other than as a formalistic expression of official disapproval.
–possibly illegal flow of foreign exchange out of China. This is a perennial problem for any country with foreign exchange controls. The time-honored method of moving funds abroad, however, is through corporate transfer pricing. But there’s no evidence of a wider crackdown, so I don’t think this is the issue, either.
–money laundering. This was a notorious problem while Macau was a Portuguese colony, and while the former casino incombent had a monopoly on legal gambling. Money of dubious origin enters the casino and leaves as legal, taxable gambling winnings–with the casino serving much the same function that urban parking lots sometimes serve on a smaller scale.
This is a serious issue. In my view, eliminating criminal influence in the Macau casino industry is the prime reason the Macau SAR granted gambling concessions to Wynn Resorts and Galaxy Entertainment. I’d be surprised and disappointed if Galaxy, Sands or Wynn were involved in money laundering. Authorities have apparently contacted all three for information, however.
–defining political have-nots. It seems that a lot, if not all, of the regulatory attention has been focused on associates of the disgraced former head of Chongqing, Bo Xilai, whom Beijing regarded as a threat to the stability of the Communist Party.
my take: my guess is that what’s going on is some combination of #3 and #4 and that any investigation will end up having little negative impact, if any, on Wynn Macau, Sands China or Galaxy. But I have no hard facts to base this view on. So my reaction is to trim my positions–the Hong Kong stocks have been very strong performers recently–and wait for further clarification.