Submitted by Pater Tenebrarum via Acting-Man blog,
Gambling Revenues Tumble
The former Portuguese trading outpost Macau, which similar to Hong Kong is a “special administrative region” of China, is a Mecca for China’s gamblers – and China is reportedly brimming with gamblers. Macau’s gambling industry has accordingly been on fire for many years.
Macau has benefited disproportionately from two major trends: the rise of a class of very rich people in China (as well as a growing middle class), and the need of corrupt bureaucrats to launder their money, resp. get it out of China.
China’s new government under Xi Jinping has made battling corruption one of its main agendas – and as it has turned out, it is quite serious about that. A number of quite high-ranking party officials have fallen prey to the effort – something that was previously unthinkable. For instance, former public security minister Zhou Yongkang, once a member of the standing committee of the politburo, is the highest ranking official to have come under investigation for corruption since the times of Mao. China is recently even running out of “luxury prison room” , as former officials who have been convicted are apparently spared the indignity of being locked up in run-of-the-mill prisons.
Xi Jinping: he has ordered a crack-down on corruption and he really means it.
(Photo credit: Thomson / Reuters)
It stands to reason that many officials who got rich in the rather permissive pre-Xi atmosphere are these days very careful about flaunting their wealth, and thinking twice about using well-known avenues for moving money around. Everybody knows about the loopholes related to Macau, so presumably the territory has lost some income from that particular source.
Indeed, the news from Macau are not good. As Marketwatch reports:
“Macau just had its worst month ever. Industry executives, investors and analysts expect 2014 to be its worst-ever year too. But the question they have is: could things still get worse? Gambling revenue in the Chinese territory fell 23% in October from the same month last year to 28 billion patacas ($3.51 billion), government data showed Tuesday. It was the worst monthly decline ever recorded, eclipsing a 17% year-over-year drop in January 2009.
The sharp fall was no surprise. Analysts had expected revenue to fall by at least 20%, and industry executives have been blunt about the grim state of affairs.
[…]
October is the fifth month in a row revenue has fallen in Macau, which had previously enjoyed five years of spectacular, uninterrupted growth. Brokerage CLSA says the losing streak will continue, forecasting revenue will fall 15%-20% in November and December from the previous year. February 2015 could even best October’s record decline, according to the firm, which tips a 25% to 30% drop as February 2014 was one for the record books too–gambling revenue rocketed up 40% to an all-time high of $4.76 billion–showing how quickly fortunes have reversed in the casino hub.
Industry executives and analysts attribute the recent poor performance in Macau to a variety of factors, particularly a Beijing-led crackdown on corruption that has caused VIP gamblers to shy away from the baccarat tables. They also cite issues such as tighter visa policies and a lack of new casino-resort openings recently.
Casino executives say they are confident the territory will bounce back at some point, but they don’t know when. “Everybody’s asking these crystal ball questions,” said a senior executive at a Macau casino company who speaks with investors. “I can’t get people to ask about what we’re doing” in terms of corporate strategy, the executive said.
On an earnings call last week Wynn Resorts Ltd. chief executive Steve Wynn specified that the company’s “nadir” in the world’s largest gambling hub is “current.” A top executive at one of Macau’s largest junket companies–the middlemen that drive the majority of Macau’s VIP gambling revenue–said market conditions are worse now than a couple months ago. The situation in Macau has deteriorated so swiftly that one analyst recently mentioned the sector in the same breath as Russia.
(emphasis added)
[ZH – this is the biggest YoY drop on record in Macau gaming recvenues]
The remainder of the article at Marketwatch deals with the idea that Macau Casino stocks could represent a contrarian opportunity due to their sharp decline. However, this may be a bit premature.
As you can see, the corruption crackdown is getting its share of the blame. However, we would argue that the ongoing economic slowdown in China must have something to do with it as well. It isn’t as though corrupt officials were the only people showing up in Macau, even though it is insinuated above that they represented the main clientele at the Baccarat tables.
China’s Economy – Soft Crash Landing Ahead?
The thing is, China’s new government is also serious about another agenda: reforming the economy. It wants to do away with the economy’s reliance on massive monetary and fiscal stimulus and the associated malinvestment orgies. The time when countless senseless construction projects produced make-believe “growth” seems finally over. Every time prime minister Li Keqiang speaks about the economy, which he essentially does most of the time, there are no good news for stimulus junkies to be had. Instead he talks about “healthy” growth, and “tough economic reform”. The term “stimulus” has yet to cross his lips. In other words, the previous bubble economy is in for a retrenchment – very likely a severe one. Here is an excerpt from one of Li’s recent speeches:
“Development does not only mean enlarging the economy through growth, but also strengthening the economy through improving quality and efficiency, Li said, adding that the ultimate target is to maintain medium and high growth, while also marching toward medium and high-end quality.
Comprehensively deepening reforms is essential, including streamlined administration and delegating power to lower levels as well as removing administrative approvals, market barriers and various other “roadblocks” while making space for markets and entrepreneurship, Li said.
To achieve stable and sustainable growth, the Chinese economy must focus on improving quality and efficiency, boosting development through reforms and seeking upgraded development, Li said.”
It is well known that China’s leadership is very concerned about social harmony and stability. With price inflation low and falling (CPI recently fell to just 1.6%) and employment data still in reasonably good shape (the unemployment rate is at 4.1%), it likely feels it can continue on the reform path without having to fear too great an upheaval from the slowly but surely imploding property bubble.
Economic reformer Li Keqiang: he means it too, by all appearances.
(Photo credit: Ed Jones/AFP)
However, one must doubt that it will be that easy. The bubble was significant, and non-performing loans on the books of China’s banks have recently only just begun to increase somewhat (their NPL data don’t look very credible as it were, something that applies also to a slew of other data coming out of China). Consider the sharp slowdown in China’s money supply growth in this context:
China, narrow money supply M1, 12 month growth: from almost 40% to just 5% in four years, via Saint Louis Federal Reserve Research click to enlarge.
Li is of course quite correct in everything he is saying above, and it is to be hoped that the reform agenda will be continued. The effects of the sharp decline in money supply growth in recent years still have to play out in full though. The property sector is under pressure, but so far, price declines have been relatively mild (note also that it is not a monolithic sector: there are significant differences between larger and medium to small sized cities with regards to the extent of overbuilding). The problems are no doubt set to become more severe.
Whether the government will continue to hew to its new reform-oriented economic policy if there is real pressure on economic growth remains to be seen. The recent decline in Macau’s fortunes is likely a harbinger of more difficult times for China’s economy. Gambling is the ultimate in discretionary spending – it is likely among the expense that are the first to get axed when people start tightening their belts.
Conclusion:
Economic data from China have generally been on the weak side of late, but not catastrophically so. And yet, apart from growing weakness in aggregated data, we also see more and more anecdotal evidence that the economy is deteriorating. Even the adoption of significant economic reform can ultimately not stop the unwinding of previous bubble excesses, although it can certainly hasten the process and lead to the establishment of a sound economic foundation sooner rather than later. Whether the government’s penchant for interventionism and stimulus measures is really gone for good is however something we will only know for sure once times really get tough.
via Zero Hedge http://ift.tt/1y6skQl Tyler Durden