How China’s Casino Enclave of Macau Could Become a Bargaining Chip in the U.S. Trade War

August 31, 2019, 10:30 AM UTC

Last week, in a violent Twitter storm, President Donald Trump “ordered” U.S. companies to leave China and return home as tensions in the U.S.-China trade war ratcheted up, with both sides warning of new rounds of tariffs ahead. As Beijing searches for more effective weapons of retaliation, it might have an ace up its sleeve in the gambling enclave of Macau, where three U.S. casino operators await to see whether their licenses will be renewed or revoked.

Wynn Macau, MGM China, and Sands China—all subsidiaries of U.S. parent companies with similar names—are three of only six corporations licensed to operate in Macau. It’s a good gig to get. Collectively, the gaming halls in Macau generated $37.6 billion in revenue last year—compared to just $11.9 billion stacked up on the Las Vegas strip—and the three U.S.-run casinos account for an estimated 60% of the Chinese territory’s gaming total.

However, all six casino concessions are set to expire in June 2022 and, so far, there’s no word from the government on what happens next. A template for retendering the licenses, known as concessions, was due to be announced in mid-2018—but then the trade war began.

“It would make a lot of sense to use the concessions as a retaliation if Trump goes ahead and escalates the trade war,” says Ben Lee, managing partner at Macau gaming consultancy IGamiX. “The outcome of the gaming concession retendering will be influenced and directed by Beijing and the trade war will factor very highly in the process.”

Taking all bets

Beijing hasn’t declared it is withholding the Macau casino licenses as leverage in the trade war. In fact, the U.S. companies were a welcome addition to the former Portuguese colony’s economy.

Visitors use slot machines in a casino in Macau in March 2019. (ANTHONY WALLACE—AFP/Getty Images)
Anthony Wallace—AFP/Getty Images

For 40 years, Macau’s gaming industry was a monopoly run by Sociedade de Turismo e Diversões de Macau (STDM), headed by Hong Kong tycoon Stanley Ho. But after the Portuguese colony was returned to Chinese sovereignty in 1999, one of the first actions by the new administration was to end Ho’s reign, during which time Macau had descended into a den of vice where gangs operated as loansharks and debt collectors. Gang-related killings were rife.

The Chinese government clamped down on the gangs, but turning Macau into a more welcoming tourist destination required market competition and foreign expertise. Beginning in 2002, the new Special Administrative Region of Macau granted concessions to six new players, three of which—most notably Nevada mogul Sheldon Adelson’s Sands—had similarly helped transform Las Vegas into a more family-friendly, international convention hub, with gambling on every corner.

However, Macau’s relationship with the U.S. operators now puts its government in an awkward position between China and the U.S. as the trade war drags on, says Patrick Chu, the chairman of one of Macau’s pan-democrat parties, New Macau Alliance.

“I think some large operators will have no problem in renewing their concessions, but I’m concerned some smaller operators may have a problem in renewing their right,” Chu says, declining to name which operators he considers “smaller.”

Money on red

Losing a Macau concession would be a significant blow to any of the U.S. companies. According to Wynn Resorts’ annual statement, the operating income across all Wynn resorts in Macau was $978 million last year, while total Las Vegas operations generated $170 million. MGM China recorded net revenues of $706 million last year, compared to $1.5 billion at MGM’s Las Vegas locations. Meanwhile, net revenue at Sands China contributed 63% of the parent company’s total.

Key Speakers And Displays At The Global Gaming Expo Asia
Scientific Games Corp. gaming chips sit on a tray during the Global Gaming Expo Asia in Macau in May 2019. (Paul Yeung—Bloomberg via Getty Images)
Paul Yeung—Bloomberg via Getty Images

Some of the U.S.-casino moguls are also major patrons of the U.S. Republican party, making them prime targets for pressure campaigns. Last year Sands China owner Sheldon Adelson, along with his wife, donated $25 million to a super PAC dedicated to maintaining the Republican’s Senate majority and previously donated $10 million to a super PAC supporting the Trump campaign.

Former Wynn Resorts chairman, Steve Wynn, was the finance chairman of the Republican National Committee and attended a Trump fundraiser just last May. According to the Wall Street Journal, Wynn was even once used by Beijing to deliver a letter to Trump requesting the extradition of a fugitive Chinese tycoon. Wynn Resorts says Steve Wynn no longer has a stake in the company.

Call my bluff

With Macau’s economy so dependent upon casinos, letting the licenses lapse for the sake of the trade war seems like a nuclear option—even in a conflict that’s increasingly self-defeating. But Lee says there are enough players wanting a stake in Macau’s gaming riches that finding new companies to take over wouldn’t be hard.

“The government will merely step in, take it over keep it running until such time as they find another party to take over the process. It’s not difficult and there is a clear-cut precedent in the public transport sector,” Lee says, referring to 2014 when the Macau government temporarily took control of bus routes operated by Reolian, which had declared bankruptcy, and retendered the concession to a new operator.

Malaysian resort operator Genting, which failed to secure a casino license when the concessions were first handed out, owns a plot of land in Macau and has expressed a continued interest in opening a casino there. There are also three local concession holders that might be eager to pick up the extra floor space. Those local casinos would also be more compliant with government directives to invest more in low-revenue, non-gaming attractions.

Failing to renew the leases wouldn’t cost the local government anything either. In the event that a concession isn’t extended, ownership of the concession holder’s casino premises and gaming equipment automatically transfers to the Macau government. Casino-less resort operators could continue to run the hotels that house the casino halls but, without gaming, the hotels would hemorrhage money.

With nearly three years left before the casino concessions expire, the trade war might end before Macau needs to release a plan for renewal. The three U.S. casino’s didn’t respond to Fortune’s request for comment on their contingency plans in case their concessions are not renewed. But a smart gambler would begin hedging their bets.

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