Sino-American tensions and intensifying political risk in the People’s Republic of China (“PRC”) are affecting not just the mainland, but also special administrative regions hitherto immune from such concerns, such as Hong Kong and Macau.

The election of a new Chief Executive of Macau in October 2024 thus highlights how political risks are worsening across the board. The new Macau administration will probably attempt to accelerate that city’s diversification away from gaming – in line with Beijing’s requirements, but at the expense of foreign-owned casinos, their investors, and downstream businesses.

Boards and executives with investments in China, Hong Kong and Macau thus need to watch closely the growing risks arising from state intervention, market scepticism, and actions to prevent capital flight, so as to anticipate threats, and to act effectively to respond to mitigate losses.

SVA can assist in helping to protect company interests in changing times.

A changing ethos

Sam Hou Fai (岑浩輝) (“Sam”) won an uncontested election to be Chief Executive of Macau on 13 October 2024. Sam is a respected former judge, and a member of the “Thirteen Taibao” (十三太保), a group of policy makers cultivated and trusted by Beijing. His victory was thus assured.

The election was notable, though, in that Sam is the first person from mainland China to govern Macau. He grew up in Zhongshan, and came to the city in 1986. He is also the first Chief Executive to come from within the justice system, and not from the business community.

Sam’s election thus promises much tighter oversight by Beijing, and so rising political risks for business in Macau – mirroring the situation in mainland China.

Common prosperity

Sam’s stated priority of diversification in Macau is firmly in line with the central government’s goals, such as “common prosperity”, which calls for income equality, and “dual circulation”, which advocates a form of autarchy.

The risks to investors in Macau’s casino concessionaires will likely increase in the coming months – for shareholders and bondholders alike. After all, the casino businesses borrowed heavily on an assumption of rapid growth in revenues. Now, those hopes seem somewhat misplaced.

Moreover, foreign investors recently identified Macau’s gaming stocks as a means to benefit from swings in the Chinese stock markets in October 2024. Gaming stocks now look somewhat exposed – with threats to foreign-owned casinos especially acute.

Diversification

The election is also a sign of tightening political control. Beijing seemingly selected the new Macau Chief Executive owing to frustration at the slow speed at which the current administration has shifted the economy away from gaming.

Macau is the only jurisdiction controlled by Beijing in which casino gaming is legal, and the sector dominates in the tiny territory. Gaming accounts for perhaps 80% of government revenues, and employs about 30% of the workforce directly (and many more indirectly).

That reliance has previously brought in wealth, but also amounts to a vulnerability. COVID lockdowns from 2020 to 2022 and anti-corruption campaigns in China previously resulted in a steep fall in revenues.

The outgoing government of Ho Iat Seng (賀一誠) did introduce new obligations on the casino companies as part of the renewal of their concessions from 1 January 2023, such as pledges to invest USD14.8 billion in non-gaming activities in Macau, such as conferences, themed amusements, sports, culture and hotels.

However, the truth is that Macau has hitherto made only limited progress in shedding its reliance on gambling, and, within that, on American gaming companies. Accordingly, in response to policy pressure from Beijing, the next Chief Executive will likely expedite measures forcing the six casino concessionaires to diversify and contribute more to social causes.

Chinese capital controls

A separate issue relates to national capital controls. Macau’s gaming sector has historically operated at the centre of a financial ecosystem built around money moving out of mainland China.

The casinos operate as the lynchpin of the system, but the ecosystem also includes junkets, banks, trading companies, pawn shops, jewellery and luxury retailers, payment systems and foreign exchange businesses, amongst others – all dependent on, and facilitating, the movement of money out of mainland China.

Beijing has long sought to halt leakage – especially so since Xi Jinping took control of the Chinese Communist Party (“CCP”) in 2012, and ever more as the economy has slowed. In 2020 the central government designated capital outflows a matter of national security.

Accordingly, the mainland and Macau authorities have intensified actions against junket promoters, triads, underground banks, and satellite casinos. Most emblematic of this shift was the jailing for eighteen years in January 2023 of Alvin Chau Cheuk Wah
(周焯華), who headed the Suncity junket, and was convicted of money laundering.

Efforts to stem capital outflows are now intensifying. Recent measures have included actions against illegal foreign exchange activities. Perhaps 11,000 money changers were arrested in Macau in 2023 – and the central government in July 2024 has called for more cooperation between China’s Public Security Bureau and Macau’s Judiciary Police.

Under the new Chief Executive’s lead, crackdowns on capital outflows will expand, perhaps geared towards ultimate plans that gaming in Macau takes place within the Chinese yuan currency zone – possibly through the use of a digital yuan. Such developments bode ill for the foreign casinos in the longer term.

Rising levels of risk

The election of a new Chief Executive in Macau is thus indicative of a growing emphasis on tighter state control and reduced flexibility for business in China as a whole – and hence of worsening political risks.

Investors in China, Hong Kong and Macau alike should carry out careful analysis and assessment, both to protect company interests, and to identify opportunities from which to profit. Independent assessments are always helpful in preparing strategies, and in framing practical decisions.

SVA can assist companies in handling such risks.

SVA

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world. SVA are also specialists in money laundering investigations, especially concerning the gaming business.

SVA has three core lines of business, which are: Business Intelligence and Political Risk; Corporate Investigations; and Special Risk.

SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations.

SVA is based in Hong Kong, Singapore, and London and operates globally.