The Chinese woman in the red fleece tracksuit slowly curls back a corner of one of the two playing cards lying face down in front of her. It is the five of hearts. At her table, shared with a dealer and three Chinese men, not a word is spoken. The only drinks in sight are tea and water.

The woman breaks the back of her second card on the green felt. The six of hearts. This is a lousy hand for baccarat. The dealer sweeps up the chips the woman wagered, and she hops to the next table, looking for better luck.

The minimum bet at this table in Macao’s City of Dreams casino is HK$2,000 ($257). While a big step up from two-cent slot machines, the stakes – and the privacy – are comparatively low. Casinos in Macao, the former Portuguese colony on China’s south-east coast, also have invitation-only, VIP baccarat rooms where HK$2m wagers are commonplace.

To appeal to high rollers, the Encore Tower at the Wynn Macau resort opened last year with four 7,000 sq ft “villa” suites, each joined to its own gaming salon. Past the front door, framed by loops of tennis ball-sized Swarovski crystals, a spokeswoman tells the Financial Times that riding the lift to a top-floor VIP gaming area could jeopardise client anonymity.

In such exclusive confines, cash is little seen and even the gaming chips are different. Unlike the round chips bought with cash from a dealer or cage in the public area, rectangular VIP chips are in essence loans provided directly by the casino or through appointed middlemen, with the gambler settling losses after the visit. “Why carry cash if you can get credit anywhere?” says a senior Macao casino executive.

The gaming companies have been playing a similar game, borrowing heavily to build huge casino hotels while counting on the winnings to pay the debt. More than $11bn has been spent over the past five years on casino hotel construction in Macao, a city of just half a million people.

The global financial crisis highlighted the stakes. Construction on some projects ground to a halt. Las Vegas Sands, the US operator with the biggest bet on Macao, saw its share price drop 99 per cent, while Sheldon Adelson, its controlling shareholder, tumbled from his perch as number three on Forbes magazine’s list of the richest Americans. But the downturn was short. Last year, gambling revenues for Macao were up by more than half from 2009 to 188.3bn patacas ($23.5bn) – more than the combined take of all the casinos in Europe, the Middle East, Africa and Latin America, according to PwC.

VIP betting and credit have been behind Macao’s swift rebound. Betting turnover began to recover after China prodded state banks to pump up lending as part of a Rmb4,000bn ($616bn) stimulus programme in 2009. This flood of liquidity arrested a slowing of the mainland economy and revived confidence.

Macao casinos ramped up lending, too. Outstanding credit to gamblers and middlemen quadrupled in less than three years to about $1.1bn by late 2010, according to UBS, the Swiss bank.

Such figures underplay the volumes involved. Macao government revenue figures imply, based on statistical win rates, that last year high rollers made almost $600bn in total wagers on baccarat, the only game played at VIP tables. Industry insiders say that 90 per cent of VIP betting is done on credit, putting last year’s volume on a par with total world purchases using Visa credit cards between October and December.

The casinos, though, have been cautious with direct lending to gamblers. They have nothing comparable to the electronic database services in the US, which help judge the creditworthiness of a new customer. Gaming debts cannot be legally enforced in mainland China, and outbound fund transfers are restricted. Moreover, Macao’s 40 per cent gross tax on casino takings makes no allowance for unpaid VIP credits.

Given those odds, a senior gaming executive says his credit lines are largely restricted to gamblers with established track records and Hong Kong private banking accounts. Instead, most VIP credit is through middlemen. Their role in identifying potential high rollers outside Macao is critical, as gambling advertising is prohibited in mainland China, the source of up to 90 per cent of the city’s VIP players.

Melco Crown Entertainment, the New York-listed owner of the City of Dreams complex, has ties to 72 so-called gaming promoters, the highest tier of middlemen who usually hold exclusive rights over certain VIP tables. Each operator in turn has a network of agents in different cities. Asia Entertainment & Resources, a New York-listed promoter with VIP rooms in three Macao casinos, has about 1,500 agents.

However, given their penchant for privacy, luring big fish is not easy. “You need to be familiar with the people in a particular city to make connections,” says Hoffman Ma, deputy chairman of Success Universe Group, a gaming company that made headlines by buying Michael Jackson’s white rhinestone glove at auction for $350,000 to use as a casino promotional tool. Ma says non-gaming affiliates in Shanghai, Beijing, Chongqing and Shenzhen help identify prospects.

“China is so big you can’t know everyone,” he says.

On the mainland especially, promoters tread discreetly. “Gambler recruiters do not tell target customers their real intention in the beginning,” CLSA, an Asian brokerage, said in a recent report. “Usually the recruiter would tell the targeted individual that he is running a travel agency based on Macao. If the friend-making process is successful, a friend-accompanied free trip to Macao will be proposed.”

Gaming promoters receive allocations of rooms, ferry tickets, show seats and meals for their clients from the casinos and, in turn, take a cut from the volume bet or lost on credit.

The key step in preparing for a trip is assessing the prospect’s assets. “It is very costly to identify customers,” says Samuel Tsang, whose family helped pioneer the VIP business in Macao in the mid-1980s. “You must know their backgrounds to know what their repayment ability is.”

To fund a month’s lending to gamblers, Macao’s middlemen require at least $6.5bn in working capital, based on calculations by CLSA. They get that via credit from the casinos as well as their own equity and debt financing. The brokerage reports that some operators are paying interest of 1.5-3 per cent a month to investors.

The workings of credit settlement between middle-men and gamblers are necessarily murky given Chinese law. Success Universe’s Ma says gamblers often put down cash, stock or property deeds as collateral before a trip. And if the collateral fails to cover the debt afterwards? Nicholas Niglio, chief operating officer for Neptune Group, one of the biggest gaming promoters, says obliquely: “The key is ‘face’ and knowing your customer.”

Until several years ago, there was no legal framework for gaming credit, even in Macao. Organised gangs, known as triads, helped fill the vacuum in lending and moving money securely across borders. When Macao went into recession in the late 1990s after a property bust, the triads clashed violently for position in the VIP market.

In 1999, as China prepared to resume authority over Macao from Portugal, Beijing cracked down on gang warfare and backed the opening of the casino market to new competitors to widen the city’s appeal to families and conventioneers who might stay longer and spend more outside the casinos than the Hong Kong day-trippers who then dominated visitor flows.

Macao’s tourist trade has blossomed since the old casino monopoly ended, with the city’s visitor count rising from 10.3m in 2001 to 25m last year. New shopping arcades, theatres, sporting events, trade shows and extra hotel rooms have had a minor financial impact given the unexpected surge in VIP betting, that was responsible for almost three-quarters of casino revenues last year.

This is driving change. The Plaza, the Las Vegas Sands-operated casino linked to the Four Seasons Hotel Macao, has set up a new premium slots area behind a privacy screen on its main gaming floor and converted a restaurant into a high-stakes table games area. Another area has been sectioned off for two new VIP salons.

In the connected Paiza Mansions building, big gamblers are provided with complimentary suites of up to 8,000 sq ft. The “basic” two-bedroom model includes a hair salon room, two massage rooms, a fitness centre, a sauna, a 12-seat dining table, a piano, a laundry room, a full kitchen, an extra-large safe and a karaoke lounge, which Jacqueline Wu, the building’s spokeswoman, says “is quite important for the mainland Chinese”. To transport such guests, the company uses a fleet of more than 71 limos, including a Maybach, a Bentley and a Rolls-Royce Phantom, as well as several private jets.

For a big gambler travelling with family, such luxuries or the presence of certain shops and restaurants can sway the choice of casino hotel, says Neptune’s Niglio. More important are the rebates high rollers have come to expect on their betting volumes. At Wynn Macau, for example, they get back 0.9 per cent of what they wager, according to CLSA.

The loyalties of the middlemen have also been influenced by rising commission levels and higher credit lines as Macao’s old monopoly morphed into a battle between six casino operators. Initially, US-based operators hesitated to engage with junket promoters, because of worries that the previous era’s criminal legacy might jeopardise their standing with US regulators. But as Macao instituted a licensing system and a credit law, they began wooing the middlemen to tap their lucrative flows of high rollers.

Few see the build-up of credit risk as a serious danger to the casinos, given allowances made for bad debt. “The absolute level of exposure is still healthy,” UBS concluded in one report, while noting more recently that MGM Resorts, one of the US-based operators, had been indirectly hit by a $16m credit default.

“There’s basically no repayment problem,” says a senior Macao casino executive, but he admits concern that some casinos have stopped asking high rollers to deposit a cheque when opening a credit line. This leads gamblers to demand the same from other casinos. “Why are you not giving me face?” quotes the executive.

Defaults have already had an impact on some Hong Kong companies that invested in gaming promoters. Amax Holdings recorded HK$2.3bn in losses on unrecovered loans to its agents last year. Dore Holdings, a rival, noted: “Most of the junkets in Macao have encountered liquidity problems due to difficulties in debt collection.”

This could become a wider problem if the VIP betting flow slows. Outside Macao, concerns linger over how junket agents do business and with whom. MGM Resorts is selling its casino in New Jersey to meet an ultimatum from regulators there, who are disturbed by the family links of the company’s Macao joint venture partner.

Chinese media reports on corruption cases continue to cite examples of officials embezzling public funds to gamble here. In March, the US urged Macao again to strengthen oversight of junket operators and cross-border currency movements to fight money laundering.

Should the veil of privacy slip, options will remain for cautious Chinese high rollers, including the fleet of cruise ships that sail nightly from Hong Kong into international waters. “A boat is a more private location,” says Ma of Success Universe, which owns one of the gambling ships. “There are people that can’t be seen in a casino.”

Copyright The Financial Times Limited 2018. All rights reserved.

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