Macao seeks to diversify its economy and take on a new role under the Bay Area Plan as its reliance on the casino industry comes into question
On December 20, 2019, Macao celebrated the 20th anniversary of its return to China after centuries of Portuguese rule. At the center of the festivities was a high-profile visit by Chinese President Xi Jinping.
In his speech at the anniversary ceremony, Xi said that the central government supported the city to develop into a service platform for economic cooperation between China and Portuguese-speaking countries, and to become a world center for tourism and leisure.
Similar to Hong Kong, Macao, China’s casino hub with a population of 700,000, has been ruled as a special administrative region (SAR) under the “one country, two systems” principle. Since neighboring Hong Kong has been roiled by more than six months of anti-government protests, often violent, amid rising anti-Chinese mainland sentiment, Macao has appeared to be on an opposite path. Not only has it embraced deepening integration with the mainland, it has upheld political stability in the past 20 years.
As China’s central government is now pushing its ambitious plan to integrate the cities of the Pearl River Delta region into a vibrant and innovative area with a strong economy, the city is facing new opportunities and challenges.
Booming Gaming Sector
Since its return to China in 1999 after 442 years of Portuguese rule, having been leased as a trading post in 1557, Macao has followed a different trajectory from Hong Kong. Prior to the handover in 1999, the city’s economy was struggling as it experienced economic
recession between 1996 and 1999.
To boost Macao’s economy, the Chinese government started to allow mainland travelers to visit Macao and Hong Kong in 2003, which immediately led to a surge in the number of mainland visitors to the city, helping to revive its economy. In 2004, the city recorded growth of 26.9 percent.
In the meantime, the city liberalized the casino and gaming sector, which resulted in a boom in gambling and associated revenues. In 2006, Macao overtook Las Vegas to become the world’s top gaming destination in terms of gaming revenue, and by 2013, the casino industry had grown so fast that the city’s gaming revenue was seven times that of Las Vegas. The booming gaming sector brought phenomenal prosperity to the city.
Between 1999 and 2018, Macao’s annual GDP growth increased from US$6.5 billion to US$55 billion, equivalent to an annual growth rate of 12 percent, which even eclipsed that of the mainland, which recorded an average growth rate of 9 percent during the same period. By comparison, Hong Kong’s average annual growth rate following its return to China was slightly over 3 percent.
In 2018, Macao hosted more than 35.8 million travelers, with 25 million, or 70 percent coming from the mainland. With a per capita GDP of over US$80,000, Macao boasts the third-highest GDP in the world, behind Luxembourg and Switzerland. According to an IMF estimate, Macao is expected to post the highest per capita GDP in 2020 on a purchasing power parity basis.
But while Macao has benefited from economic integration with the mainland, its increasing reliance on the gaming industry leaves the city vulnerable to external factors. In 2018, the casino and gaming sector accounted for 50 percent of the city’s GDP, up from about a quarter in 1998, and 80 percent of the city’s annual government revenue came from the sector, which means the city is subject to any economic and political turmoil at the regional and global level.
For example, the city’s economic growth rate dropped from 14.3 percent in 2007 to 1.7 percent in 2009 when the global financial crisis struck. In 2014, after the Chinese leadership launched a major anti-graft campaign, the city saw its gambling sector decline for 26 months consecutively, leading to an economic recession of -0.4 percent in 2014.
This year, the city is expected to record its first annual revenue decline since 2016, due to dampened spending from mainland visitors caused by China’s continuing economic slowdown and its ongoing trade war with the United States.
Diversification Push
Beijing and Macao have been taking steps to diversify the city’s economy. In the 12th Five Year Plan published by the central government in 2011, Beijing said that it would support Macao in developing a diverse economy by promoting tourism, leisure, exhibition, traditional medicine and cultural industries.
Following the difficulties the city’s gaming sector experienced after the Chinese leadership launched its anti-corruption drive in 2013, Xi called for Macao to diversify its economy by focusing on building a global tourism and leisure center in a speech marking the 15th anniversary of the city’s return to China.
In 2016, in its first five-year development plan, the Macao government launched a diversification plan with a primary focus on promoting the meetings, incentives, conferences and exhibitions (MICE) sector. The plan also aimed to establish the city as a service provider for economic cooperation between China and Portuguese-speaking countries, taking advantage of China’s Belt and Road Initiative.
Since then the MICE industry has been one of the fastest growing sectors. According to Lionel Leong, Macao’s Secretary of Economy and Finance, the value of MICE industries increased from 1.4 billion pataca (US$174.8m) in 2015 to 3.6 billion pataca (US$449.6m) in 2017, a 147 percent jump in just two years. Between 2014 and 2018, the number of non-government meetings increased more than 75 percent with an average annual increase of 11 percent.
This year, after China launched the Greater Bay Area plan in February, the position of Macao’s economy was further elevated. According to the plan, which covers 70 million people in 11 cities in China’s Pearl River Delta region, Macao is listed as one of the four key cities and core engines in building the area into an innovation and financial powerhouse to rival Silicon Valley in the US and the Tokyo Bay Area in Japan. The other three cities are Guangzhou, Shenzhen and Hong Kong.
To support the future development of Macao, one of the most densely populated regions in the world with an area of 33 square kilometers (12.7 square miles), the central government has reserved a large area on nearby Hengqin Island.
In 2018, 50,000 square meters of land was reserved for Macao to specifically develop high-technology and medical services. It was also reported that a larger tract of land covering 15,700 square meters in the south of Hengqin Island is also slated to be allocated to Macao. To attract investment, the provincial governments of Guangdong and Macao launched a cooperation development fund of 20 billion yuan (US$286m) to support businesses in the designated area in the island.
Financial Center?
As the Chinese government further articulated the details of the Greater Bay Area Plan, Beijing has put forward a vision to build Macao into a financial center.
Many consider it a response to the persistent unrest in Hong Kong. As political turmoil in Hong Kong looks set to continue, jeopardizing its role in China’s development, it is speculated that Beijing is now eyeing Macao as a backup.
In October, He Xiaojun, general director of the Financial Supervisory Authority of Guangdong Province, said at an economic forum that a plan to set up an offshore yuan-based stock exchange in Macao has been submitted to the central government.
As He’s comments drew media attention and speculation, the Macao Monetary Authority responded that the plan to establish a yuan-denominated stock market in Macao was still in the study phase and that it had contracted an undisclosed international consulting firm to develop a feasibility study on the establishment of a securities exchange.
According to Lionel Leong, Macao needs not only to study the feasibility of being a financial center, but also should assess the well-being of other financial hubs to make a decision on the city’s future position in regional financial markets.
In the run-up to Xi’s visit to the city in December, the authorities launched a new campaign to establish the city’s financial profile. On December 5, the People’s Bank of China, China’s central bank, announced that it had signed a three-year bilateral currency swap agreement worth 30 billion yuan (US$4.26b) with Macao.
On December 18, the first day of Xi’s visit, the central bank said that it would raise the daily limit of individuals’ remittances from Macao to the mainland to 80,000 yuan (US$11,412) from 50,000 yuan (US$7,220) to facilitate cross-border trade, followed by an announcement made the next day to allow Macao payment apps to be used in the entire Greater Bay Area.
On December 19, China’s banking and insurance regulator unveiled a raft of policies to increase financial cooperation between the mainland and Macao, including allowing insurance capital from the Chinese mainland to be invested in Macao. In the meantime, Macao banks are encouraged to set up branches in the mainland, and mainland Chinese finance firms will get support to expand into Macao.
On December 21, one day after Xi’s keynote speech, the State Administration of Foreign Exchange (SAFE) announced that to support Macao’s development, it will relax restrictions on raising debt and ease currency restrictions for Hengqin-Macao enterprises, and will simplify the payment and remittance application procedures for these enterprises.
Regarding the much-speculated stock exchange, Securities Times under People’s Daily reported on December 21 that Guangdong provincial government had been working closely with Macao authorities to speed up the process for the stock exchange.
Inward Looking
According to Song Ya-Nan, associate professor of the School of Business at the Macao University of Science and Technology, Macao will face challenges in developing its financial industry. “Macao’s financial industry has been rather inward looking and its relatively small size may not be able to sustain the ambition to develop it into a regional financial hub,” Song said. Moreover, with its small talent pool and rather conservative immigration policy, the city does not have enough financial professionals to tackle the task.
So far, Macao officials appear to have taken a rather cautious stance.
Chan Sau San, Chairman of the Board of Directors of the Monetary Authority of Macao, told NewsChina that as there are several well-established financial hubs in the region, Macao needs to seek to play a complimentary role based on its advantages and disadvantages, rather than a competitive role.
Chan said the city will focus its financial sector on supporting the real economy. By taking advantage of its role as a platform for cooperation between China and Portuguese-speaking countries, the city can develop its bond market, improve integration of financial infrastructure and strengthen investment cooperation with mainland partners.
“It will be a long-term process,” Chen Xiaoping, Deputy General Manager of the Bank of China Macao branch, said. “Macao needs to diversify its financial industries by firstly establishing an offshore bond market, and then develop a yuan-based stock market,” he told NewsChina.
For Ip Kuai Peng, a professor from the City University of Macao, regardless of how successful the financial industry may be, Macao will benefit greatly from the Greater Bay Area Plan, especially with the land on Hengqin Island.
“With over 30 million visitors a year, advanced tourism and service industries and ample financial reserves, Macao has great potential,” Ip said.
“The key is for different cities in the bay area to make coordinated policies so that different cities can complement each other’s advantages,” he added.
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