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R 181051Z DEC 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 9209
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UNCLAS SECTION 01 OF 04 HONG KONG 002313 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV MC CH HK
SUBJECT: THE MACAU SAR ECONOMY AT 10: EVEN JACKPOTS HAVE 
CONSEQUENCES 
 
REF: A. HONG KONG 2262 
     ¶B. HONG KONG 2156 
     ¶C. HONG KONG 1493 
     ¶D. HONG KONG 561 
     ¶E. 08 HONG KONG 209 
 
¶1.  (SBU) SUMMARY:  Ten years after reversion to mainland 
China, the Macau Special Administrative Region (MSAR) bears 
little resemblance to the somnolent Portuguese-run enclave of 
popular imagination that existed before 1999.  The opening of 
the gaming market and a flood of Chinese tourists, combined 
with the end of the multi-fiber arrangement, have 
fundamentally altered the nature of Macau's economy, bringing 
increased prosperity but also creating opportunities for 
corruption and increasing social tensions.  Macau today is a 
gaming boomtown, filled with foreign tourists and foreign 
laborers.  The dream to get rich quick, the huge flows of 
cash, and the attraction of high-paying jobs in the growing 
casino sector continue to challenge the MSAR's ability to 
combat corruption and illicit financial activity and to 
diversify its economy beyond gaming and tourism.  END SUMMARY 
 
From Textile Exporter to Vegas East 
=================================== 
 
¶2.  (U) Macau's economy in 1999 was in the doldrums following 
four consecutive years of declining GDP.  Median income was 
less than USD 8,000 per person and trending down with 
unemployment over 6.5 percent.  Manufacturing, banking, real 
estate development, and tourism (including gaming) were the 
primary drivers of Macau's economy.  Textile and garment 
manufacturing was the largest industry, accounting for almost 
20 percent of GDP.  Virtually all of Macau's textile 
production was for export, with about half shipped to the 
United States.  Tourism was less important.  In 1999, Macau 
hosted just over 7 million tourists; more than two-thirds of 
these arrived from Hong Kong, with another 20% split evenly 
between mainland China and Taiwan. 
 
¶3.  (U) The past ten years have brought radical changes to 
Macau's economy.  The most significant of these were the 
decision to abolish the monopoly on gaming that had been in 
place since the 1960s and the PRC's decision to permit 
Mainland Chinese to travel more easily to Macau, combined 
with the decision to abolish the monopoly on gaming that had 
been in place since the 1960s.  In 2002, the Macau 
authorities agreed to expand the number of gaming licenses to 
three and then six.  U.S. operators Las Vegas Sands, Wynn, 
and MGM, Hong Kong-based Galaxy, and Australian gaming 
operators Crown joined Macau,s SJM in the Macau casino 
market.  Prompted by the economic downturn that followed the 
SARS epidemic, mainland China and Macau signed a Closer 
Economic Partnership Agreement (CEPA) in 2003 that abolished 
tariffs on over 250 goods and services.  The Individual Visit 
Scheme opened the door to individuals from selected Chinese 
cities to travel independently to Macau.  Tourists from 
Mainland China increased from just over 800,000 visitors in 
1999 to over 5.7 million in 2003, and exceeded 11.6 million 
in 2008.  Total visitors increased to over 22 million in 
¶2008.  The global economic crisis and tighter PRC exit visa 
policy slowed visitor arrivals in 2009, but tourism has 
recently rebounded and Macau is on track to host about 22 
million visitors in 2009. 
 
¶4.  (U) The majority of tourists, whether from mainland China 
(50 percent), Hong Kong (32 percent), Taiwan (6 percent), 
Japan (2 percent), or South East Asia (6 percent), go to 
Macau to gamble.  In 2003 Macau had 15 casinos with annual 
gaming revenues of less than USD 5 billion.  At the end of 
2009, Macau hosted 34 casinos, with projected 2009 revenues 
of over USD 14 billion. Another seven casinos have been 
approved and are targeted to open by 2011, assuming 
construction resumes.  Macau government statistics put U.S. 
direct investment in Macau at over USD 2 billion but U.S. 
gaming companies say they have already invested over USD 7 
billion in Macau since 2003 to build luxury hotels, 
restaurants and casinos, with the promise of several billion 
more to come in the years ahead. 
 
¶5.  (U) The Macau government takes 39 percent of total gaming 
revenue in taxes, leading to large fiscal surpluses.  In 2007 
and 2008, government revenues were more than double 
expenditures.  The Macau government has begun to return a 
portion of these funds to residents by increasing subsidies 
to the elderly, giving each resident a USD 750 "bonus", 
expanding social insurance programs to cover two-thirds of 
 
HONG KONG 00002313  002 OF 004 
 
 
Macau residents, and providing free education through the 
university level for Macau residents.  The Macau government 
has also spent money on a new sports stadium and will begin 
in 2010 to spend significant sums on infrastructure 
development projects, including a light rail system and a 
land reclamation project that will expand Macau's territory 
by 12 percent. 
 
Rapid Growth Leads to Labor Pains 
================================= 
 
¶6.  (SBU) Macau's GDP growth has averaged 14 percent since 
2000 and topped 25 percent in both 2004 and 2007.  The MSAR's 
explosive growth has increased demand for construction 
workers and casino and hotel staff.  Macau's unemployment 
rate is just 3.5 percent.  Rising demand for labor and a 
quota system that requires casinos and construction companies 
to hire local Macau workers have increased wages.  Rising 
demand for casino workers, however, has led to criticism that 
Macau's youth are forgoing higher education and training to 
make easy money as card dealers and croupiers.  Foreign labor 
accounts for between 20-25 percent of all workers in Macau, 
but that percentage will grow if new casino and hotel 
projects resume in 2010 as expected.  The influx of foreign 
labor since 2004 has increased social tensions and protests 
against illegal and foreign workers.  This led the Macau 
government to pass a labor law in October 2009 that, upon 
taking effect in April 2010, will establish stiff criminal 
penalties for employers of illegal migrant workers.  The new 
labor law will also impede foreign workers from changing 
employers (ref B). 
 
Combating Corruption 
==================== 
 
¶7.  (SBU) Macau's rapid growth and the huge sums of money now 
passing through the economy have raised concerns about 
Macau's ability to combat corruption, money-laundering and 
other illicit financial activity.  In 2006, following an 
investigation by the Macau Commission Against Corruption, 
former Transportation and Public Works Secretary Ao Man-long 
and several members of his family were arrested for taking 
bribes worth an estimated USD 100 million to award building 
contracts (including the new stadium) in Macau from the 
period 1999-2006.  After a well-publicized trial, Ao, his 
wife, and four other relatives were sentenced to jail in 
January 2008, with Ao receiving a sentence of 27 years (ref 
E).  While applauding the investigation and conviction of Ao, 
critics charge that he could not have engaged in corrupt 
practices for so long without the knowledge of other senior 
Macau officials.  Following Ao's arrest, approvals for new 
construction projects stalled as Macau officials took extra 
care to avoid the appearance of impropriety.  In late 2009, 
the Director of the Financial Services Bureau was forced to 
take indefinite leave when it was discovered that she and two 
subordinates had inflated reimbursement claims to defraud the 
Macau government out of almost USD 500,000. 
 
Macau Laundry Service 
===================== 
 
¶8.  (SBU) Massive flows of money and relatively weak controls 
over financial transactions make Macau a target for those 
seeking to launder illicit funds.  Banco Delta Asia's (BDA) 
lack of anti-money laundering (AML) controls made this Macau 
bank a useful tool for the North Korean regime to transfer 
funds related to illicit trade.  The U.S. Treasury designated 
BDA in 2005 as a "primary money laundering concern" under 
Section 311 of the USA PATRIOT Act.  This led to renewed 
efforts on the part of the Macau government to cooperate with 
investigations of money laundering, adopt stricter AML 
regimes, create an independent Financial Investigation Unit, 
and join international AML organizations such as the Egmont 
group.  Despite rapid progress, particularly with regard to 
regulation and oversight of Macau's financial sector, 
weaknesses remain.  Treasury's final ruling in 2007 prohibits 
U.S. financial institutions from doing business with BDA and 
has effectively prevented the bank from engaging in any 
foreign currency transaction.  However, the bank continues to 
operate under its original management, but is limited to 
Macau Pataca business in Macau only. 
 
¶9.  (SBU) The casino and hospitality sector now accounts for 
well over half of Macau's GDP.  Yet its phenomenal success is 
based on a formula that facilitates if not encourages money 
laundering.  Mainland Chinese gamblers account for a large 
 
HONG KONG 00002313  003 OF 004 
 
 
share of the lucrative VIP gaming market, betting literally 
billions of dollars despite Chinese government-imposed 
capital controls that restrict Chinese residents to taking 
just USD 50,000 worth of currency out of China each year. 
Success of the VIP market in Macau depends on "junket 
operators" who arrange visas, supply local currency financing 
and provide access to VIP gaming rooms in Macau casinos.  VIP 
gambling accounts for over 60 percent of Macau's casino 
revenues.  Although they must register and are subject to 
nominal regulation in Macau, these facilitator organizations 
allegedly work closely with organized crime groups in 
mainland China to identify customers and collect debts. 
Junket operators work directly with Macau casinos to buy 
gaming chips at discounted rates, allowing players to avoid 
identification.  Know-your-customer (KYC) and record-keeping 
requirements are significantly looser than in other 
international gaming venues.  Government efforts to regulate 
junket operators in Macau have been aimed at limiting 
competition, rather than combating illicit activities. 
Oversight of both casinos and junket operators is limited and 
remains a serious weakness in Macau's AML regime.  Periodic 
tightening of Chinese Individual Visitor Scheme permit 
requirements may reflect Chinese government concern about 
corrupt officials laundering money in Macau. 
 
The End of Exports 
================== 
 
¶10.  (U) Exports, particularly of textiles and garments, were 
the largest single pillar of Macau's economy and a major 
employer of low-skilled labor before the end of the gaming 
monopoly.  In 1999, textiles accounted for 80 percent of all 
Macau exports, 85 percent of manufacturing employment and 
almost 20 percent of GDP.  The end of the multi-fiber 
arrangement in 2005 made continued production in Macau 
uncompetitive with operations across the border in Guangdong 
Province.  Exports peaked in 2004 at USD 2.8 billion but 
textile production has steadily declined since 2005, and with 
it Macau,s textile-dependent export sector.  Through the 
first ten months of 2009, Macau,s total exports fell by 54 
percent from 2008 to less than USD 800 million.  Textile 
exports fell by 75 percent to just USD 142 million and now 
account for just 17 percent of Macau,s exports.  Higher 
returns to land, labor and capital in the gaming and 
entertainment sector make the future of manufacturing in 
Macau look increasingly bleak.  The CEPA agreement with 
mainland China reduced tariffs on most Macanese goods to zero 
and has opened the gate to Chinese tourism, but it has not 
been sufficient to save Macau's manufacturing industries. 
Even with the collapse of textile exports to the U.S., China 
was Macau,s third largest export market (after Hong Kong and 
the U.S.) with sales of just USD 115 million. 
 
Why Diversify? 
============== 
 
¶11.  (SBU) As Macau's economy has grown, it has become ever 
more reliant on gaming as a source of revenue and job 
creation.  Chinese leaders have publicly encouraged Macau to 
diversify its economy.  Macau has supported efforts to adopt 
the Las Vegas model ) promoting the SAR as a hub for 
Meetings, Incentive trips, Conferences, and Events (MICE) and 
encouraging casinos to build family-friendly entertainment 
options.  These efforts have had some success; through the 
first nine months of 2009, MICE-related activities attracted 
over 200,000 visitors to Macau (about 1 percent of Macau,s 
total tourist arrivals).  The Venetian Sands now competes 
with Hong Kong and Guangzhou to host regional and 
international exhibitions and regularly hosts well-known 
entertainers and sporting events, as well as a Cirque du 
Soleil troop.  The newly opened City of Dreams casino also 
hosts similar entertainment for those wanting to get away 
from the casino tables.  However, entertainment and MICE 
businesses are still far from providing the economic 
diversity Macau leaders hoped for. 
 
¶12.  (SBU) Macau leaders have also proposed promoting 
tertiary education as a means of diversifying Macau's economy 
and training local residents to take management positions 
currently filled by foreign workers.  Macau currently hosts 
nine public and private universities, colleges, and 
vocational training schools.  University of Macau, Macao 
Polytechnic Institute, and Macau University of Science and 
Technology are the largest and offer programs in liberal arts 
and social sciences, management, education, physical sciences 
and tourism.  Enrollment in Macau's larger universities is 
 
HONG KONG 00002313  004 OF 004 
 
 
growing, with mainland Chinese making up an increasing 
percentage of Macau university students.  The government 
recently received approval from the PRC to build a new campus 
of the University of Macau across the Pearl River into 
Hengqin Island of Guangdong Province.  Construction of the 
new campus is expected to commence in 2010 and be completed 
within three years. 
 
¶13.  (SBU) Industry observers expect relatively free traffic 
flow across the Pearl River between Macau and Hengqin Island, 
and other large-scale non-gaming developments will soon 
commence construction on Hengqin.  Guangdong's party boss and 
governor in December 2009 elevated Hengqin Island's 
administrative status and announced a USD 10.7 billion 
investment plan for the island, including a USD 5.6 billion 
business district, a USD 1.8 billion electricity generating 
station and a USD 1.5 billion amusement park -- all to be 
built over the next 3-4 years.   The island's non-gaming 
economic development should reduce the increasingly 
integrated Macau/Hengqin economic unit's reliance on gaming, 
and lessen pressure on Macau to diversify its economy within 
its own borders.  Macau interlocutors note that with limited 
land, a small labor force, and huge returns on property and 
gaming investments, there is little incentive for investors 
to look at more difficult and less lucrative investments in 
other industries. 
MARUT