What will the role of the gaming industry be in building the new financial system?
MB April 2021 Special Report | Financial Hub in the making
Imagining that the problems affecting the creation of a stock exchange in Macau (namely, the lack of legislation and skilled labour) are solved; there is one that no longer depends on political will: what companies will be interested in being listed in Macau, when they can do it in Hong Kong or Shenzhen (or even Shanghai)?
An answer comes immediately: what if the Government obliges, as a condition for the attribution of gaming licenses in the next year, the operators to be listed in this new stock exchange?
Once the present gaming operators are listed in Hong Kong, “they can return to Macau for secondary listing transactions and contribute to Macau’s financial development,” stated researchers Lin and Xu, from City University of Macau. (Macau Business contacted Professor Lin Deqin to find out how this return would be made, but we were unsuccessful.)
The idea of gambling dealers dispersing capital on the stock exchange, “could, ironically, deepen the dependency of the gambling sector’s territory, since the market performance would be linked to the growth of casino revenues”, believes Nick Marro, from Economist Intelligence Unit. “Realistically, the casino sector is such an important part of the economy that it would inevitably have to play a large role in developing the financial sector. Beyond considerations around capital availability, the casinos are just simply too big to ignore,” Mr Marro explains to Macau Business. “As a result, this could indirectly enhance Macau’s dependence on its gambling sector in many ways, particularly considering the absence of other sources of capital.”
Tianglei Huang, Research Fellow, Peterson Institute for International Economics (PIIE), also expresses fears that at end of the day the results are not those desired. “Diversifying away from Macau’s heavy reliance on gaming may also result in an outflow of capital from casinos into capital markets, creating problems for the city’s public finance,” wrote Mr Tianglei.
The researcher explained to Macau Business: “what I meant by ‘an outflow of capital from casinos into capital markets may create problems for the city’s public finance’ is simply that this is one possible unintended consequence that diversification could result in.” The Washington DC-based researcher highlights the fact that now the MOX only trades bonds, not yet equity. But “in the future, when MOX becomes the host of Macau’s stock exchange with more and more firms from the Greater Bay Area and beyond getting listed on MOX, some capital now sitting in Macau’s casinos may flow to the equity market. This may become a problem for the public finance if the tax revenue collected from financial services is not yet up to the task of compensating the lost revenue from gaming.”
To avoid risks of deepening the economic dependence of the gambling sector, Professor Jacky So (MUST) advises that “regulations and technology can be set up. Currently the gambling operators can do the same, since capital can flow freely from and to Hong Kong and Macau. Anti-money laundering laws can be applied to the situation.” And his former University of Macau colleague Rose Lai (Professor in Finance, Faculty of Business Administration) adds: “That has to depend on the determinations of the Macau (and Chinese) government in the scope of the exchange. A best way is to do it big and do it right since the beginning, which of course is not easy.”
Why zero public debt?
The Research Fellow, Peterson Institute for International Economics, sees several “challenges that the government’s diversification efforts may encounter”. But – he explains to Macau Business – “these do not mean Macau should not diversify its economy. It definitely should. It simply needs to be prepared to deal with challenges like this.”
Tianglei Huang suggests an innovative idea: “the government in Macau may even want to consider raising debt at one point to support the city’s economic diversification. Having little, even zero, public debt is not (and should not be) a goal of the government. The government should be ready to borrow when there is a need. If diversification means the government may lose some traditional sources of revenue, there is no reason not to consider pursuing the possibility of issuing debt.”
Last December, Bloomberg reported that the local government has been discussing terms with casino operators for introduction of the digital yuan.
Bloomberg underlined several advantages to taking this step, namely shrinking the role of the junket industry by reducing their ability to provide credit and exchange currency. But a few days later the Gaming Inspection and Coordination Bureau said “the use of digitized renminbi in casinos is a false report”.
Although analysts from JP Morgan predict this is “highly unlikely in the foreseeable future,” nobody doubts that the e-yuan will arrive, particularly since it is a technology promoted by Beijing: less than a year ago, the Chinese Ministry of Commerce announced that a pilot project for a Chinese digital currency would begin soon in various areas of the country, including in Macau.
On the other hand, the local Monetary Authority revealed that a preliminary review of the Macau Currency Issuing System has already started, to develop the necessary legislative work with the aim of the law to include the use of digital currency.