The government gets involved in Macau foreign currency issues

Of course, as we all know, you can't beat our Grande Vegas online casino for fun when and where you want it.

And yet, for that once-in-a-whatever vacation, Macau is a serious destination for many international visitors, but also for Chinese gamblers.  But, new regulations on foreign currency transactions, announced by the Chinese government late last month, made Macau’s casino operators nervous. The waters are starting to calm now as they say that, as of today, there are no signs of any negative impact on the junket operators or on the gaming market.

Analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu are trying to determine how and if the new regulations will impact Macau’s casinos. “The devil is in the details and enforcement,” they wrote. “It’s unclear as of yet what (if anything) the government will target.”

Analysts at Sanford Bernstein, an investment research and management firm that specializes in the Far East casino industry, added: “The junket conversations we have had so far are that there has been some ‘chatter’ around these new pronouncements, but this seems more like talk and nothing more at this stage. From our sources, there has been no meaningful disruption in money flows in the channels – i.e. ‘business as usual’.”

New Law

On January 31st the Chinese Supreme People’s Court and the Supreme People’s Procuratorate issued a judicial interpretation of laws that are designed to regulate foreign currency transactions. The regulations, which were handed down by central authorities in late January, highlight foreign exchange movement transactions.

According to the analysts, “A strict reading of the rules implies almost all avenues of money movement outside of banks is restricted. But the reality is that this was largely the case already. For example, it has always been technically illegal to have pools of capital that match sellers and buyers of renminbi – the backbone of underground banks.” Sanford Bernstein analysts noted that most of the targeted transactions were already illegal in China.

Macau Junkets

Financial analysts in the East explain that Macau junkets often employ underground banking networks to transfer money between mainland China and Macau. The worry is that the new crackdown on underground banking could hurt junket liquidity.

Fitch Ratings Inc says that it expects China’s “shadow financing” – which includes underground banks – to decline in 2019. This would be the second consecutive year of decline.  The agency said such decline is expected to occur gradually since the Chinese authorities “balance reining in excessive leverage and supporting economic growth”.

Fitch Ratings wrote, “The regulatory crackdown on shadow banking should, if maintained, support the long-term stability of the financial system and reduce risks for asset managers, but is likely to continue to create funding challenges across the economy in the near term, particularly for private-sector enterprises.”  

Sanford Bernstein analysts explained that China’s new regulations give “law enforcement more tools to work with in targeting activity that was already largely operating outside the bounds of what is allowed….in the end, enforcement will be the key to what happens. It is too early to say at this stage what the impact on Macau may be. If the rules are all strictly enforced and the scope of government action against all forms of money movement is deep and broad, the impact would be severe”.

The expectation is that small agents and junkets are going to be most impacted by the new regulations. “The view from the large junkets is they are broad enough with numerous channels where creative mechanisms are always in play.”

The brokerage noted some of the impacts which might include consolidation among the junket operators with the goal of creating a more diversified capital base. This could be accompanied by a  shift by Macau casinos to more under-the-table betting – a move which would impact VIP gross gaming revenue negatively.


Macau police believe that the major source of the evasion of normal currency export regulations from China involves UnionPay terminals. These terminals, also called “point of sale” (POS) units, are modified illegally to prompt the UnionPay network to identify them as being registered and operated in mainland China. This results in the user paying lower transaction fees than those charged by the UnionPay system in China.

Another evasion tactic involves purchasing, and then returning for a cash refund, high-value goods at pawnshops and jewelers in Macau.

Macau authorities are actively trying to take action against the use of unauthorized foreign currency exchanges and unauthorized POS machines. The Macau Monetary Authority has introduced tighter, real-time monitoring systems for UnionPay cash withdrawals and payment. Those systems include ATMs that use facial recognition technology to authenticate the user. Other supervisory methods are being investigated as well.  

Good News in Macau

There’s some good news for the Macau casino industry which translates into good news for the Macau territory. Even before the February Chinese New Year surge, the city’s casinos reported that their January take was up, netting Macau over $1.26 billion in gaming taxes. That puts this January’s take at $.18 billion more than it collected in January 2018.

Gaming revenue now accounts for 10.4% of the forecasted amount for 2019. This means that Macau needs to readjust its projections – city planners previously stated that they were expecting $12.151 billion in 2019 taxes, of which $10.194 billion would come from the casinos.

Macau’s total tax revenues include taxes from the casinos, horse and greyhound racing, traditional Chinese lotteries,  commissions earned by junket promoters and instant lotteries. Macau taxes gaming operators 35% in taxes on their GGR (gross gaming revenue). Together with added taxes, this makes the effective tax rate of 39%. 

February also promises to be a good month for the Macau taxman. The month included the  Chinese New Year when visitation to Macau increased by 26.1% over the same period last year. Some of that tourism involved non-gaming visitation but all in all the city expects to see a continued improvement in gambling numbers. If so, Macau could ultimately break its full-year forecast. 

Macau’s woes with Mainland China could be offset by a year of increased tourism, especially if that increase includes an upsurge in VIP tourism.

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