Gambling legalisation in China: the view from Beijing

In February of this year, Bloomberg caused a rumpus by revealing what it claimed were plans to legalise gambling in Mainland China. “There is a roadmap that has paved the way for casinos to physically open on Hainan Island, and that is the big shocker and the big news that a lot of the stocks are reacting to,” trumpeted a commentator on Bloomberg TV. “If the plan eventually leads to the opening of physical casinos on Hainan you’re going to see Macau directly threatened.”

Four months later, in June, the big American news agency stirred up yet more controversy with sensational claims that casinos were, in fact, poised to open on Hainan. The stocks of Macau’s Hong Kong listed concessions plunged 3.7 per cent on the same day.

In truth, however, Bloomberg’s reports were wide of the mark. Hainan has been granted special status in China to pilot new leisure activities. This, indeed, should make it the first Mainland province to legally operate casinos. Yet there are very good reasons for thinking this is way over the horizon and will not happen for at least a decade.

Firstly, there is Chinese law, which clearly prohibits casinos. More importantly, there is the Communist Party’s deeply rooted and rigid hostility towards gambling, as repeatedly expressed in the words and deeds of China’s leaders. The Mainland’s political system discourages bold experimentation by leaders. When change actually happens it must be gradual. So, before there can even be discussion of casinos, milder forms of gambling will have to be trialled and accepted.


China’s problem

In 2004, Peking University researcher Wang Zengxian shocked his peers with the claim that 600 billion yuan was flowing out of China each year in the form of losses suffered in foreign casinos. At the time it was certainly an exaggeration, but there is no doubt about a huge outflow. Macau alone made 220 billion yuan (US$33 billion) gross gaming revenues last year, nearly all of it from Chinese gamblers. How do China’s leaders view this?

China’s leaders do not give interviews to outside media, but there is still a way of deciphering what they are thinking. To guide their policies they rely upon research. Researchers can sometimes be persuaded to talk.

As a former head of the Chinese Academy of Fiscal Sciences, Jia Kang is more influential than most. The Academy is a think tank with China’s Ministry of Finance, which overseas the nation’s economic policy and annual budget. He believes that the problem is pressing.

“In China we get all of the problems associated with gambling, brought back by our gamblers from their overseas trips” he says. “But we don’t get any of the benefits.”

Within the Mainland’s borders, state-run lotteries – or caipiao(彩票) – raked in more than 400 billion yuan last year, a large share of which went into the government’s coffers. But prohibition of other kinds of gambling has driven it underground, where it acts as a motor for organised crime and police corruption.

If China were to build and tightly regulate integrated resorts, Jia believes, billions of dollars that now go to gangsters, foreign casinos or foreign concessionaires could instead be funnelled into developing the Mainland’s tourism industry. A well managed gaming industry could become a rock solid source of government revenue. As a good example, he points to Hong Kong’s racing monopoly, the Jockey Club, popularly referred to as ‘the government’s ATM’.

“All of these considerations demand a far-reaching and comprehensive evaluation,” says Jian. “But in China for many years it has been an issue that nobody dares talk about. There is no indication that this will change.”

Communist propaganda has traditionally condemned the three evils – prostitution, drugs and gambling. Under the concept of caipiao, Jia says some flexibility is allowed. But contemplating the wider issue of gambling legalisation is still completely out of bounds. “I have never heard of China’s leaders formally discussing the problem of the outflow and how liberalisation might address it,” he says. “There is absolutely no willingness to do so.”

So, while Jia recommends China study well disciplined examples of legalisation, such as Singapore, he also says nobody in the top leadership is ready to countenance such advice.


Enter Hainan

Most foreign observers – along with many in China – would agree that the Communist Party owes its survival to the flexibility of the great reformer Deng Xiaoping. If China can change, that is because Deng established the gradual path for it doing so – summed up by the phrase ‘Crossing the river by feeling for the stones.’

In line with this, China will have to thoroughly evaluate milder forms of gambling allowed by a flexible interpretation of the term caipiao before moving on to hardcore casinos and their games of chance. In addition to lotteries, caipiao could be taken to mean other kinds of parimutuel betting.

The tropical island of Hainan was a pilot for Deng’s reforms in the early 1980s as one of China’s five original Special Economic Zones. Unlike other SEZs such as Shenzhen and Zhuhai it never really prospered from its liberal privileges. The chief effect was perhaps a property bubble that burst and ruined a lot of people. Thus, in 2009 the central government had another go, designating it as a special zone for the development of international tourism.

The State Council directive that went with the new status – ‘Suggestions for the Development of Hainan as an International Tourism Island’ – was a 28-paragraph list of economic activities to explore. The first paragraph emphasised Socialism with Chinese Characteristics, Deng Xiaoping Thought, and Jiang Zemin’s ‘Three Represents’ as the project’s guiding standards.

The 12th paragraph concerned culture, sport, and conferences and exhibitions. In addition to activities such as golf and filmmaking, it also identified two forms of parimutuel caipiao gambling: betting on major international sports fixtures and ‘sports lotteries of a guessing nature.’ The latter could be taken to mean things like football pools and complex accumulator betting on races.

According to Jia Kang, Hainan’s leaders subsequently did absolutely nothing to act upon the dispensation they had been granted: in fact, “they never dared to move,” he says.

Jia attributes the timidity to the tried and tested path to career success within the Chinese political system. “If you do something daring and out of the ordinary you invite attack,” he says. “If you fail it could destroy your career, so better never take risks.” The Chinese language has many proverbs to describe this behaviour. One translates as ‘The wise man looks after his own hide,’ while another counsels ‘Doing less is preferable to doing more.’

In April of this year China’s central government made Hainan a pilot zone for a third time, when Xi Jinping named it a free port or Free Economic Zone. This time the State Council directive – ‘Guiding Suggestions to Support Hainan’s Comprehensive Deepening of Opening and Reform’ – ran to 31 paragraphs, with the first naming ‘Xi Jinping Thought for New Era Socialism with Chinese Characteristics’ the guiding principle.

Buried in the 12th paragraph, on developing tourism, were the same two forms of parimutuel betting found in the 2009 directive. But this time they were accompanied by a new gambling-related activity: horseracing.


Chinese horseracing: a sorry saga

Investors, not to mention the media, promptly jumped on the addition. One fast mover has been Luoniushan Co. (000735.SZ), which almost immediately announced a partnership with China Horse One, a veteran of Guangzhou’s now defunct racetrack. The plan was to develop an ‘international equestrian park’ on 620 hectares of land outside the northern Hainan city of Haikou.

Other companies reporting plans include Hainan Ruize (002596.SZ), Fujian Zhongfu Industries (000592.SZ) and Xinjiang Tianshan Animal Husbandry Bio-engineering (300313.SZ).

‘Horseracing’, the word used in April’s directive, is not the same as ‘horse wagering’, which has never been permitted in China. Enthusiasts hope that the former term, when combined with Hainan’s theoretically permitted parimutuel betting, will translate into the latter. Yet seasoned hands are sceptical, pointing to China’s decades-long effort to develop horseracing, which has never really taken off because of local governments’ repeated refusal to budge on the issue of betting.

While Hainan has never had a horseracing track, several other Chinese cities have. Most have failed.

Take, for starters, Beijing. For three years until 2005, Hong Kong businessman Yun Pung Cheng funded a circuit at Tongshun, some 60 kilometres to the capital’s east. His bet was that the authorities would eventually defer to the lesson of his home city, and allow punters to indulge. In the end it is not clear if he ran out of patience or money. When Tongshun closed, some 600 thoroughbreds were put down.

Far away from the central government, southern Guangzhou’s circuit was perhaps the most popular because it found a way to sidestep the law. Racegoers were charged an abnormally high entry fee for tickets that carried the numbers of competing horses. Prize money was paid, and eventually more than 40 ‘ticket offices’ sprang up around the city.

The high point came in 1999, when the Guangzhou Jockey Club’s vice-chairman, Huang Qihuan, penned an editorial for The People’s Daily, the mouthpiece of the Chinese Communist Party. It was a call for the relaxation of betting laws, and it attracted the beady eye of the central leadership. Huang was investigated for corruption and imprisoned. His racetrack was shut down. Today, it is the site of a car trading industrial park.

If the course in the central city of Wuhan is still operating, that may be because the city’s leaders have been more careful. In 2011, deputy mayor Liu Shuni called in vain for the liberalisation of horse wagering at the annual session of the National People’s Congress in Beijing. A successful equine industry, he said, could serve as an economic engine for the entire province of Hubei.

Veterans say the funds needed to pay for the technology, infrastructure and the veterinary expertise of a thriving horseracing industry can only be generated from legal gambling. To prove their point they compare Hong Kong, which hosts over 700 races a year, to a mere 60 staged across the entire expanse of Mainland China.


The curious case of Sanya Bay Mangrove Resort Hotel

If horseracing in Hainan may never get going, why all the excitement about casinos? The hoopla, it transcends, can all be traced back to a single tourist development.

Opened in 2012, the Sanya Bay Mangrove Resort Hotel was the creation of one-time PLA soldier and journalist turned property mogul Zhang Baoquan. He made an initial fortune in the oil industry in Beijing before migrating to Hainan and procuring some 27 hectares around the bay of the southern city of Sanya.

According to media accounts, Zhang’s early achievement was to sidestep local zoning restrictions, building units classified as apartments on land limited to hotels and conference centres. Investors who bought the apartments in effect became shareholders of the entire resort. The crown jewel of the project was an ‘entertainment bar’ offering baccarat tables and decor copied directly from Macau. Instead of betting cash, guests bought tokens which could be won or lost, but not redeemed for cash. Punters could exchange their winnings for hotel services and gifts like iPads or jewellery. It was an arrangement similar to pachinko today in Japan.

To market his project Zhang actually used the slogan ‘Buy into Sanya Bay Mangrove Resort and become a shareholder in China’s Las Vegas’. An undercover investigation by China Central Television in 2014 found that winnings could indeed be redeemed for cash. This was followed by a police raid, the arrest of four staff, and the closure of the resort.

The tale took a curious turn in February this year when an appeal to the Sanya Intermediate People’s Court acquitted the arrested staff members. The Resort, the court said, had not touched money or derived easy gains, and its offering did not possess the traits of true gambling.

Neither the court nor the Sanya city government has responded to requests to clarify this ruling.

Since the ruling, Bloomberg says, at least five resorts have readied similar ‘cashless casinos’ for opening once they get the green light from the authorities.

Investment bank Union Gaming was quick to deflect any perceived threat to Macau. In a note to clients, it said the Sanya Bay Mangrove facilities, which its staff had experienced directly, offered no competition to Macau’s gaming floors ‘from virtually any point of view . . . While small stakes ‘wagering’ on a small number of tables might be tolerated for a period of time in order to keep some of the resorts in the black, any small step the Hainan operators take to offer legitimate gambling will be met with an immediate and harsh reaction from the authorities’.

‘True gambling’ as offered by casinos is clearly prohibited by Chinese law. As a game of chance, baccarat is undoubtedly fundamentally different from the two new forms of parimutuel betting China’s State Council has permitted Hainan to explore. To leapfrog from lotteries to hardcore casino games would expressly go against Deng Xiaoping’s fundamental principle of reform. Perhaps the last word, however, should come from Hainan’s rulers.

Jia Kang is in no doubt about what he thinks is needed. “They should act to fulfill Hainan’s status as a pilot zone,” he says. “By being the first to try things out you demonstrate their worth to the whole country. You change the thinking of those that govern and you change the attitudes of society. You move forward slowly in this way, one step at a time.”

In May of this year Hainan’s Party Secretary Liu Cigui presided over the provincial congress’s annual plenary session. In 2017 he had taken over from his predecessor Luo Baoming, who had held the top position for six years. There may, therefore, have been some expectation of change. Yet, pronouncing on the development of Hainan as a Free Trade Zone, Liu remained true to tradition, exhorting his government to resolutely prohibit the three vices of prostitution, gambling and drugs.

Following the meeting, the congress released a 46-paragraph list of measures to be taken to realise Hainan’s potential. It was a long document that spoke repeatedly of the need to ‘ease market entry’, ‘broaden financial reform’, ‘optimise the business environment’ and ‘advance the recruitment of a thousand talents’. Throughout its entire 16,000 characters ‘horseracing’ was only mentioned once. Caipiao – the term that can be flexibly interpreted to include parimutuel betting – did not appear at all.