Ask one hundred individuals to name the first gambling destination they think of and more likely than not, most of them will think about Las Vegas. Some might mention Monaco, Atlantic City or other destinations but… Macau? Probably not. At least not as far as the average individual is concerned and this is perhaps a textbook example of something we have mentioned repeatedly here at ChinaFund.com: the fact that the average person (especially Westerners) doesn’t quite get how economically dominant China* is at this point in time.
What does this have to do with Macau?
Simple. All you have to do is tell the previously mentioned people that Macau’s gambling industry is the #1 one worldwide and that despite having a population of less than one million, its gambling industry is seven times larger than that of Las Vegas: the quasi-universal eyebrow raises you will be on the receiving end of should make it clear just how deep the gap between perception and China-related economic realities is. You might have noticed the “*” which has been used on two occasions and this is because Macau and Hong Kong are two so-called “Special Administrative Regions” or, in other words while they do not have complete political autonomy, they have varying degrees of autonomy on multiple levels, especially autonomy with respect to economic and administrative matters.
As such, Macau ended up becoming one of the world’s most prosperous regions, even occasionally hitting position #1 globally when it comes to metrics such as GDP per capita by PPP (Purchasing Power Parity). With its impressive HDI (Human Development Index) and the 4th best life expectancy worldwide at this moment in time, this highly urbanized region represents a fascinating economic case study.
To provide a bit of non-economic context, it is worth noting that geographically speaking, Macau is located in southern China, on the west of the Pearl River estuary and is surrounded by the (in)famous South China Sea. One should not lets its size of slightly below 33 km2 or the population of roughly 667,000 be misleading, Macau is definitely an economic force to be reckoned with.
Moving away from geography, one might argue that the “history” of Macau started in 1557, when the Ming Dynasty leased this territory to the Portuguese Empire so as to act as a trading post. China still firmly dominated the region up until 1887, when it was forced to grant Portugal perpetual colonial rights, a Portugal which would remain “in charge” of the region up until 1999, when Macau was returned to China. One of the many humiliating concessions China had to make after losing the Opium Wars, in other words.
Fast-forward to the present and Macau is prospering, with a nominal GDP of over $50 billion. We can consider it the world’s #83 economy, which may not seem impressive in the absence of the previously-mentioned geographical context but once we factor in its small size and population… let’s just say reasons to be impressed start popping up.
In a nutshell, Macau has managed to achieve economic success through its status quo service sector (capitalist) economy, thanks especially through gambling and tourism. This is sometimes a blessing, sometimes a curse, as Macau can most definitely be considered dependent of gambling revenue in light of the fact that almost 80% of its yearly government revenue is generated from gambling activities and at this point in time, these activities account for almost 50% of Macau’s GDP (down from a peak of 60% in 2013).
Furthermore, a lot of this revenue comes as a result of its favorable geographic position or, to put it differently, in light of the fact that gambling is illegal in nearby Hong Kong and mainland China. “Diversification” is most definitely a word Macau has become less and less familiar with. For example, the fact that manufacturing-related exports accounted for almost 37% of Macau’s GDP in 1985 and represent less than 1% nowadays speaks for itself.
Socio-politically speaking, while Macau has one of the highest GDP per capita levels worldwide, it is also a “leader” when it comes to inequality and various other forms of economic discrepancy. All in all, we can definitely consider this jurisdiction both fascinating and complex.
As a bit of a conclusion, here is how things stand when it comes to Macau and what investors in China need to know about it:
- Macau is a (relatively) independent region, quite independent when it comes to matters that pertain to its economy and less so if we are to refer to political independence
- Its economy is more than robust on a per capita basis, thanks especially to gambling and tourism. However, this (over)dependence poses a potentially systemic risk, especially in light of the fact that at various points in the future, the current context which brought about gambling-related prosperity might end up being altered and also in light of the fact that it depends heavily on variables outside its direct control (for example, its quasi-nonexistent agriculture which makes Macau dependent on food imports)
- Just like the other Special Administrative Region (Hong Kong) as well as regions such as Taiwan, it is interesting and at the same time important (in the spirit of conducting a thorough analysis) to observe the dynamic of the People’s Republic of China and the Communist Party of China when it comes to the relationship with let’s call them “tricky” jurisdictions