Cablegate: The Macau Sar Economy at 10: Even Jackpots Have

DE RUEHHK #2313/01 3521051
R 181051Z DEC 09




E.O. 12958: N/A

E. 08 HONG KONG 209

1. (SBU) SUMMARY: Ten years after reversion to mainland
China, the Macau Special Administrative Region (MSAR) bears
little resemblance to the somnolent Portuguese-run enclave of
popular imagination that existed before 1999. The opening of
the gaming market and a flood of Chinese tourists, combined
with the end of the multi-fiber arrangement, have
fundamentally altered the nature of Macau's economy, bringing
increased prosperity but also creating opportunities for
corruption and increasing social tensions. Macau today is a
gaming boomtown, filled with foreign tourists and foreign
laborers. The dream to get rich quick, the huge flows of
cash, and the attraction of high-paying jobs in the growing
casino sector continue to challenge the MSAR's ability to
combat corruption and illicit financial activity and to
diversify its economy beyond gaming and tourism. END SUMMARY

From Textile Exporter to Vegas East

2. (U) Macau's economy in 1999 was in the doldrums following
four consecutive years of declining GDP. Median income was
less than USD 8,000 per person and trending down with
unemployment over 6.5 percent. Manufacturing, banking, real
estate development, and tourism (including gaming) were the
primary drivers of Macau's economy. Textile and garment
manufacturing was the largest industry, accounting for almost
20 percent of GDP. Virtually all of Macau's textile
production was for export, with about half shipped to the
United States. Tourism was less important. In 1999, Macau
hosted just over 7 million tourists; more than two-thirds of
these arrived from Hong Kong, with another 20% split evenly
between mainland China and Taiwan.

3. (U) The past ten years have brought radical changes to
Macau's economy. The most significant of these were the
decision to abolish the monopoly on gaming that had been in
place since the 1960s and the PRC's decision to permit
Mainland Chinese to travel more easily to Macau, combined
with the decision to abolish the monopoly on gaming that had
been in place since the 1960s. In 2002, the Macau
authorities agreed to expand the number of gaming licenses to
three and then six. U.S. operators Las Vegas Sands, Wynn,
and MGM, Hong Kong-based Galaxy, and Australian gaming
operators Crown joined Macau,s SJM in the Macau casino
market. Prompted by the economic downturn that followed the
SARS epidemic, mainland China and Macau signed a Closer
Economic Partnership Agreement (CEPA) in 2003 that abolished
tariffs on over 250 goods and services. The Individual Visit
Scheme opened the door to individuals from selected Chinese
cities to travel independently to Macau. Tourists from
Mainland China increased from just over 800,000 visitors in
1999 to over 5.7 million in 2003, and exceeded 11.6 million
in 2008. Total visitors increased to over 22 million in
2008. The global economic crisis and tighter PRC exit visa
policy slowed visitor arrivals in 2009, but tourism has
recently rebounded and Macau is on track to host about 22
million visitors in 2009.

4. (U) The majority of tourists, whether from mainland China
(50 percent), Hong Kong (32 percent), Taiwan (6 percent),
Japan (2 percent), or South East Asia (6 percent), go to
Macau to gamble. In 2003 Macau had 15 casinos with annual
gaming revenues of less than USD 5 billion. At the end of
2009, Macau hosted 34 casinos, with projected 2009 revenues
of over USD 14 billion. Another seven casinos have been
approved and are targeted to open by 2011, assuming
construction resumes. Macau government statistics put U.S.
direct investment in Macau at over USD 2 billion but U.S.
gaming companies say they have already invested over USD 7
billion in Macau since 2003 to build luxury hotels,
restaurants and casinos, with the promise of several billion
more to come in the years ahead.

5. (U) The Macau government takes 39 percent of total gaming
revenue in taxes, leading to large fiscal surpluses. In 2007
and 2008, government revenues were more than double
expenditures. The Macau government has begun to return a
portion of these funds to residents by increasing subsidies
to the elderly, giving each resident a USD 750 "bonus",
expanding social insurance programs to cover two-thirds of

HONG KONG 00002313 002 OF 004

Macau residents, and providing free education through the
university level for Macau residents. The Macau government
has also spent money on a new sports stadium and will begin
in 2010 to spend significant sums on infrastructure
development projects, including a light rail system and a
land reclamation project that will expand Macau's territory
by 12 percent.

Rapid Growth Leads to Labor Pains

6. (SBU) Macau's GDP growth has averaged 14 percent since
2000 and topped 25 percent in both 2004 and 2007. The MSAR's
explosive growth has increased demand for construction
workers and casino and hotel staff. Macau's unemployment
rate is just 3.5 percent. Rising demand for labor and a
quota system that requires casinos and construction companies
to hire local Macau workers have increased wages. Rising
demand for casino workers, however, has led to criticism that
Macau's youth are forgoing higher education and training to
make easy money as card dealers and croupiers. Foreign labor
accounts for between 20-25 percent of all workers in Macau,
but that percentage will grow if new casino and hotel
projects resume in 2010 as expected. The influx of foreign
labor since 2004 has increased social tensions and protests
against illegal and foreign workers. This led the Macau
government to pass a labor law in October 2009 that, upon
taking effect in April 2010, will establish stiff criminal
penalties for employers of illegal migrant workers. The new
labor law will also impede foreign workers from changing
employers (ref B).

Combating Corruption

7. (SBU) Macau's rapid growth and the huge sums of money now
passing through the economy have raised concerns about
Macau's ability to combat corruption, money-laundering and
other illicit financial activity. In 2006, following an
investigation by the Macau Commission Against Corruption,
former Transportation and Public Works Secretary Ao Man-long
and several members of his family were arrested for taking
bribes worth an estimated USD 100 million to award building
contracts (including the new stadium) in Macau from the
period 1999-2006. After a well-publicized trial, Ao, his
wife, and four other relatives were sentenced to jail in
January 2008, with Ao receiving a sentence of 27 years (ref
E). While applauding the investigation and conviction of Ao,
critics charge that he could not have engaged in corrupt
practices for so long without the knowledge of other senior
Macau officials. Following Ao's arrest, approvals for new
construction projects stalled as Macau officials took extra
care to avoid the appearance of impropriety. In late 2009,
the Director of the Financial Services Bureau was forced to
take indefinite leave when it was discovered that she and two
subordinates had inflated reimbursement claims to defraud the
Macau government out of almost USD 500,000.

Macau Laundry Service

8. (SBU) Massive flows of money and relatively weak controls
over financial transactions make Macau a target for those
seeking to launder illicit funds. Banco Delta Asia's (BDA)
lack of anti-money laundering (AML) controls made this Macau
bank a useful tool for the North Korean regime to transfer
funds related to illicit trade. The U.S. Treasury designated
BDA in 2005 as a "primary money laundering concern" under
Section 311 of the USA PATRIOT Act. This led to renewed
efforts on the part of the Macau government to cooperate with
investigations of money laundering, adopt stricter AML
regimes, create an independent Financial Investigation Unit,
and join international AML organizations such as the Egmont
group. Despite rapid progress, particularly with regard to
regulation and oversight of Macau's financial sector,
weaknesses remain. Treasury's final ruling in 2007 prohibits
U.S. financial institutions from doing business with BDA and
has effectively prevented the bank from engaging in any
foreign currency transaction. However, the bank continues to
operate under its original management, but is limited to
Macau Pataca business in Macau only.

9. (SBU) The casino and hospitality sector now accounts for
well over half of Macau's GDP. Yet its phenomenal success is
based on a formula that facilitates if not encourages money
laundering. Mainland Chinese gamblers account for a large

HONG KONG 00002313 003 OF 004

share of the lucrative VIP gaming market, betting literally
billions of dollars despite Chinese government-imposed
capital controls that restrict Chinese residents to taking
just USD 50,000 worth of currency out of China each year.
Success of the VIP market in Macau depends on "junket
operators" who arrange visas, supply local currency financing
and provide access to VIP gaming rooms in Macau casinos. VIP
gambling accounts for over 60 percent of Macau's casino
revenues. Although they must register and are subject to
nominal regulation in Macau, these facilitator organizations
allegedly work closely with organized crime groups in
mainland China to identify customers and collect debts.
Junket operators work directly with Macau casinos to buy
gaming chips at discounted rates, allowing players to avoid
identification. Know-your-customer (KYC) and record-keeping
requirements are significantly looser than in other
international gaming venues. Government efforts to regulate
junket operators in Macau have been aimed at limiting
competition, rather than combating illicit activities.
Oversight of both casinos and junket operators is limited and
remains a serious weakness in Macau's AML regime. Periodic
tightening of Chinese Individual Visitor Scheme permit
requirements may reflect Chinese government concern about
corrupt officials laundering money in Macau.

The End of Exports

10. (U) Exports, particularly of textiles and garments, were
the largest single pillar of Macau's economy and a major
employer of low-skilled labor before the end of the gaming
monopoly. In 1999, textiles accounted for 80 percent of all
Macau exports, 85 percent of manufacturing employment and
almost 20 percent of GDP. The end of the multi-fiber
arrangement in 2005 made continued production in Macau
uncompetitive with operations across the border in Guangdong
Province. Exports peaked in 2004 at USD 2.8 billion but
textile production has steadily declined since 2005, and with
it Macau,s textile-dependent export sector. Through the
first ten months of 2009, Macau,s total exports fell by 54
percent from 2008 to less than USD 800 million. Textile
exports fell by 75 percent to just USD 142 million and now
account for just 17 percent of Macau,s exports. Higher
returns to land, labor and capital in the gaming and
entertainment sector make the future of manufacturing in
Macau look increasingly bleak. The CEPA agreement with
mainland China reduced tariffs on most Macanese goods to zero
and has opened the gate to Chinese tourism, but it has not
been sufficient to save Macau's manufacturing industries.
Even with the collapse of textile exports to the U.S., China
was Macau,s third largest export market (after Hong Kong and
the U.S.) with sales of just USD 115 million.

Why Diversify?

11. (SBU) As Macau's economy has grown, it has become ever
more reliant on gaming as a source of revenue and job
creation. Chinese leaders have publicly encouraged Macau to
diversify its economy. Macau has supported efforts to adopt
the Las Vegas model ) promoting the SAR as a hub for
Meetings, Incentive trips, Conferences, and Events (MICE) and
encouraging casinos to build family-friendly entertainment
options. These efforts have had some success; through the
first nine months of 2009, MICE-related activities attracted
over 200,000 visitors to Macau (about 1 percent of Macau,s
total tourist arrivals). The Venetian Sands now competes
with Hong Kong and Guangzhou to host regional and
international exhibitions and regularly hosts well-known
entertainers and sporting events, as well as a Cirque du
Soleil troop. The newly opened City of Dreams casino also
hosts similar entertainment for those wanting to get away
from the casino tables. However, entertainment and MICE
businesses are still far from providing the economic
diversity Macau leaders hoped for.

12. (SBU) Macau leaders have also proposed promoting
tertiary education as a means of diversifying Macau's economy
and training local residents to take management positions
currently filled by foreign workers. Macau currently hosts
nine public and private universities, colleges, and
vocational training schools. University of Macau, Macao
Polytechnic Institute, and Macau University of Science and
Technology are the largest and offer programs in liberal arts
and social sciences, management, education, physical sciences
and tourism. Enrollment in Macau's larger universities is

HONG KONG 00002313 004 OF 004

growing, with mainland Chinese making up an increasing
percentage of Macau university students. The government
recently received approval from the PRC to build a new campus
of the University of Macau across the Pearl River into
Hengqin Island of Guangdong Province. Construction of the
new campus is expected to commence in 2010 and be completed
within three years.

13. (SBU) Industry observers expect relatively free traffic
flow across the Pearl River between Macau and Hengqin Island,
and other large-scale non-gaming developments will soon
commence construction on Hengqin. Guangdong's party boss and
governor in December 2009 elevated Hengqin Island's
administrative status and announced a USD 10.7 billion
investment plan for the island, including a USD 5.6 billion
business district, a USD 1.8 billion electricity generating
station and a USD 1.5 billion amusement park -- all to be
built over the next 3-4 years. The island's non-gaming
economic development should reduce the increasingly
integrated Macau/Hengqin economic unit's reliance on gaming,
and lessen pressure on Macau to diversify its economy within
its own borders. Macau interlocutors note that with limited
land, a small labor force, and huge returns on property and
gaming investments, there is little incentive for investors
to look at more difficult and less lucrative investments in
other industries.

© Scoop Media

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