CLSA: US Casino Companies Won’t Be Trade War Casualies
Jonathan Galligan, the director of Asia Gaming & Conglomerates at Hong Kong’s CLSA (Credit Lyonnais Securities Asia), said American casino companies operating in Macau are not likely to be targets in a trade war between China and the United States. As U.S. President Donald Trump threatens another round of tariffs in his economic standoff with mainland China, some analysts had suggested Las Vegas Sands, Wynn Resorts, and MGM Resorts might be targeted for sanctions.
Mr. Galligan, a longtime watcher of US/China economic and business activity, said that is not likely. China continues to build Macau into an “attractive and diverse tourist destination”.
Any manipulation of the US companies would harm one-half of Macau’s thriving casino economy, thus undermining the government’s own long term goals. At CLSA’s annual Investors’ Forum in Hong Kong this week, Galligan told a group of reporters that the trade war would have to be long and difficult before the US gaming companies were targeted.
The CLSA analyst said, “But you would need to see the trade war deteriorate significantly before that would be brought on to the table because I don’t think it’s in the interest of China to do that.”
China to Take Rational Approach
He added that China would likely take a “rational” approach, instead of holding hostage companies which have invested billions in Macau. Such a policy would undermine China’s ability to lure other American businesses to China, while having wider implications for China’s business-friendly policies for companies from other nations.
Galligan added, “I think, ultimately, the Chinese will take a very rational view on Macau.”
2013 Anti-Corruption Crackdwon
That might be so, but it would not be the first time politics interfered with Macau’s economy. When President Xi Jinping came to office in 2012, he promised a new era where official and business corruption would not be tolerated. In 2013, Xi made good on that promise, as he began a widespread anti-corruption crackdown on the Chinese mainland.
The crackdown targeted Communist Party officials and China’s eastern business class. It was wildly popular with the emerging Chinese middle class, who had grown criticial of corruption among bureaucrats and the conspicuous consumption of billionaires in Shanghai and elsewhere. Xi Jinping became the most popular Chinese leader since Mao Zedong.
2014-2015 Macau Junket Operator Crackdown
In June 2014, the crackdown came to Macau. Chinese high-rollers were a big part of the 10-year rise of Macau from a provincial backwater to the largest casino destination city in the world. Chinese officials and new billionaires were the VIP high rollers who paid massive amounts of cash to junket operators, who paid big fees to Macau’s casinos to host private VIP gambling rooms on the Cotai Strip.
Junket operators were a result of Beijing’s gambling laws. Macau casinos cannot collect gambling debts in mainland Chinese courts, so they refuse to offer casino markers (IOUs) to high rollers. To compensate, the junket system arose. Junket operators offered credit to the high rollers, then collected debts through extralegal measures — i.e. the organized crime units known as triads.
Why Macau Became a Target
In retrospect, it was certain that Xi Jinping’s anti-corruption crackdown would hit Macau hard. The combination of China’s wealthy elite, organized crime, and lots of uncounted cash assured the auditors and investigators would scrutinize the system. When it did, Macau faced 26 months of decline, while US and Chinese casino companies lost 40% to 50% of their value on the Hong Kong and New York stock exchanges.
No doubt, a certain amount of corruption was real. The flight of junket operators with tens of millions or hundreds of millions of dollars proved that true. At the same time, the revelations of the Panama Papers showed that members of Xi’s inner circle also were not above corruption, so a backwards view of the corruption crackdown shows a political motive — to eliminate potential rivals in the party under the cloak of anti-corruption. Such an inference means only that even moral crusaders can have mixed motives.
It also means that Jonathan Galligan is totally right, so long as China’s leaders follow a rational approach. Humans and their leaders do not always follow rational policies, though, even the most rationale among them.
Hainan Island Initiative
Also, the Beijing government has shown it would undermine Macau’s standings in other ways, such as clearing the way for Hainan Island casino gambling in the coming years. Beijing’s policies towards Macau are more complicated than what Jonathan Galligan states.
Hurting US Companies Would “Stifle Investment”
Still, the CLSA analyst is right in saying China would be irrational to undermine US casino companies for the sake of a trade policy. Galligan added, “Negatively putting pressure on certain operators is not how you’re going to achieve that ultimate goal. And I think the Chinese will probably rise above the rhetoric of the trade spat to recognize that the current competitive environment in Macau doesn’t need political headwinds that would stifle investment.”
The Asia Gaming and Conglomerates analyst probably is correct. The US/China trade war, if indeed that is what is, likely will burn itself out long before Macau becomes a battlefield in that war.
There are those who believe President Trump wants to use the trade war as a political tool for votes in the November 2018 midterm election, to show his voters he is keeping a campaign promise (getting tougher on China). If so, then the Trump Administration will come to an arrangement with Xi’s government in another couple of months, when the need to show toughness is over. In that scenario, Jonathan Galligan’s analysis most certainly will be correct.