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It is a Saturday night in peak season August at Apex, an elite club in China’s only legal gambling region. The entertainment is baccarat, a luck-driven card game that takes five minutes to learn and fewer than 30 seconds to play, with a HK$10,000 ($1,300) per hand minimum.

But the invitation-only game on the 39th floor of the Conrad hotel on the Cotai Strip in Macau is eerily quiet. Seven of the 10 tables are empty. One man is loudly betting 10 chips at a time, but most play just one. Nobody glances at the line of slot machines or the one roulette table. Bored staff outnumber guests by three to one.

A few streets away at The Venetian, the baccarat tables are bursting with energy. Here the minimum bets are HK$300 and the crowds are in their 20s and 30s. A table with five seats has 15 or 20 people hovering, placing their own chips on someone else’s cards. Gamers do not just wager on individual hands; they bet on trends. When a lucky streak heats up, whether it is for the player or the banker, crowds flock to the table and bet in unison. When the game dictates they draw a third card, players tap the table hard and yell out, “Jiu!” — Mandarin for the winning number of nine. Losing hands are tossed back to the dealer with a contemptuous shrug.

“It’s a group mentality,” says one player, watching. “They ‘squeeze’ the cards for suspense, folding them just enough to see the numbers, and the whole table gets involved.”

As unlikely as it may seem, this game of chance is almost alone responsible for the explosive growth Macau has seen in the past 15 years. In 2013, the peak for gaming, just under two-thirds of gambling revenue stemmed from VIP rooms where baccarat is typically the only game played. But Beijing views this model as unsustainable and undesirable, driven by shady business dealings that bypass China’s strict capital controls.

“Junkets”, the do-everything middlemen groups, served as the economy’s lifeblood. It is the junkets’ role to lure wealthy Chinese from the mainland into Macau’s VIP rooms, anonymously, then lend them cash so they can throw HK$1m per hand at the baccarat tables. Chinese visitors are not allowed to enter Macau with more than Rmb20,000 ($3,100), nor can they take out more than $50,000 per year. So the junkets offer the VIPs cash in local currency, backstop any losses to the casinos upfront and then recoup the money in renminbi.

But there is a snag: Beijing courts do not recognise gambling debts, so if they are not paid, the junkets have to rely on “extra-legal” means, which can include organised crime.

Xi Jinping, president of China

Last December, Xi Jinping, China’s president, intervened in Macau, warning of “certain deep-seated problems”. Before the clampdown began, about half the high-rollers in the region were government officials or executives at China’s state-owned industries, according to 2010 research by the Macau Polytechnic Institute. Monthly revenues have now shrunk for 15 straight months, just as fast as they boomed. In February, during the important Chinese New Year period, game-spending fell by nearly half, the most on record. Every month since has seen a year-on-year decline in excess of 34 per cent. Shares of the six big casino operators have declined by two-thirds since their peak in January 2014, wiping more than $100bn off their collective market value.

“Obviously the slowdown in Macau is more severe in truth than any of the operators foresaw,” James Packer, Australian casino magnate, told CNBC in May. “It’s very hard to be critical of a corruption crackdown . . . [but] when and how that ends is something that no one knows.”

Xi’s nationwide clean-up is not aimed at Macau per se, it is directed at graft. But a Venn diagram comparing corruption in China with the drivers of the Macanese economy might just require a single circle. Jamie Soo, gaming analyst for Daiwa Capital Markets, says the peninsula excels in four areas: gaming, money laundering, entertainment (including prostitution) and luxury shopping (often linked to bribery). Xi has sent a battering ram through each of these pillars. So while China grows at an estimated 7 per cent this year, Macau’s economy is in recession. In the second quarter alone it shrank by 26 per cent.

James Packer, Australian casino magnate

Macau, like Hong Kong, is a former European colony and now a “special administrative region” of China with its own laws and currency. What finance is to Hong Kong, gambling is to Macau, it’s often said. This is a gross understatement: finance accounts for 16 per cent of Hong Kong’s GDP; in Macau, gaming is half the economy and drives 85 per cent of government revenue. Gambling was made legal in the 1850s but it was only in 2002, after the 1999 handover from Portugal, that the sector was liberalised so Chinese tycoons and foreigners (chiefly Americans) could build lavish casinos.

In 1999, total gaming revenue was $1.6bn. By 2006, it had surpassed Las Vegas, making Macau the world’s undisputed gaming hub. By 2013, Macau gaming was bringing in $45bn, a figure seven times that of Vegas, and the government was taxing the revenue at more than 35 per cent.

But the growth was lopsided. As a 2008 academic study concluded, the “most striking feature of the Macau economy is that it is not just heavily dependent on a single industry (gaming) but also on a single source of players (mainland China) and a single segment of the market (high-rollers playing baccarat)”.

While the junket-fuelled growth model for Macau was always unsustainable, the speed at which deadly curveballs were thrown at the industry caught many off guard. As Xi’s campaign against corruption ramped up in 2014, Macau was hit by a series of unfortunate events:

• In April, a small junket operator absconded with HK$8bn-$10bn, highlighting a risk of capital flight hitherto ignored.

• In May, the Macau authorities cracked down on the illegal use of UnionPay terminals that allow even small-time gamblers to bypass capital controls.

• In July, transit visas were restricted to stop high-rollers from taking multiple trips to Macau under the guise of business.

• In October, smoking was banned across the main gaming floors.

The anti-corruption drive has only ramped up since, as officials involved in illegal gaming were made public and prostitution rings were broken up.

“The industry has had at least 12-15 months of just constant negative policies,” Lawrence Ho, Melco Crown chief executive, told investors in August. “I do think that VIP, structurally, will never be what it once was.”

Reports of the first junket closures early in 2014 sent shockwaves through the industry. In the previous eight years, the number of registered junkets had ballooned from 76 to 235. Last year, more than a fifth pulled out. “Consolidation” is the term used by analysts but in reality, the numbers are falling through attrition, not mergers.

“A very ugly model is going to come to an end,” says Steve Vickers, a risk consultant and former head of the Royal Hong Kong Police force’s criminal intelligence bureau. “The days of 90 per cent of your profits coming from 2 per cent of your punters are gone.”

A croupier arranges cards on a baccarat table inside the Broadway Macau Casino

Funding is drying up. The junkets operate by issuing loans and recovering the cash within 15 days. But as China’s economy slows and the crackdown on graft deepens, the average recovery time is now two to three months, analysts say.

It has now become routine for the junkets to miss the contractual minimums they have in the VIP rooms, but competition is slowing and the casinos cannot fill the tables either, so there have been few consequences. “We don’t ask them to go,” says one casino executive. “It would be unwise because we don’t have any replacement.”

More closures are expected. In early August, Beijing devalued China’s currency nearly 3 per cent, making Macau more expensive for mainland tourists. Within another two weeks, the Shanghai Composite fell by a fifth and China’s central bank stepped up its efforts to clamp down on money laundering. Daiwa, which forecasts that year-on-year VIP gaming revenue will fall 41 per cent, following an 11 per cent decline in 2014, estimates that nine junkets left the business in August alone.

“We’re becoming more self-reliant because the junkets just can’t pick up the slack at this point,” Robert Goldstein, president and chief operating officer of Las Vegas Sands, told investors in July. “I hope the junkets resurrect but right now it doesn’t look promising. But what is happening is a mass market is emerging.”

A tourism brochure for Macau reads 'Oldest foreign colony in Far East, Founded in 1557'

Casinos are luring the masses by cutting minimum bet sizes, halving hotel rates and showcasing more Vegas-style entertainment. As the peninsula morphs from gambling haven to family-friendly entertainment zone, many analysts are optimistic about Macau’s long-term prospects in the new model. CLSA, an Asian brokerage, notes Chinese tourism is expected to hit 200m by 2020, double the figure from 2013.

Under pressure from Beijing, the six big casino operators are playing their part, spending billions of dollars on new developments in what’s called the “build it and they will come” model.

By 2016, tourists will be eating baguettes at a half-size Eiffel Tower, taking pictures from the world’s first figure-of-eight Ferris wheel and standing in awe of gondolas shaped like smoke-breathing dragons. The following year, the world’s longest bridge is expected to offer a road link from Hong Kong airport.

But the more family-friendly Macau will find it difficult to generate the same levels of profits.

Daiwa’s Soo says small-time spenders mean more pain for the former European colony. “How much headcount do you need, betting HK$300, to offset one HK$1m payer from the equation? How many hotel rooms do you need for each of these HK$300 players to come in?” He thinks for a moment. “The maths doesn’t make sense.”

Aaron Fischer, an analyst at CLSA, concedes getting back to the high-growth spurt years is fanciful. But it doesn’t matter. “Nobody was forecasting the growth years, they were just icing on the cake,” he says. “We aren’t going back to those levels.”

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