Lessons for Hong Kong in Macau

The contradictions between China’s socialist, nationalist and freewheeling capitalist identities were on full display this week with the visit of President Xi Jinping to the Macau Special Administrative Region.

They also demonstrated why the Hong Kong SAR has every reason to be worried about maintenance of its autonomy under the One Country Two Systems principle.

Xi was in Macau, nominally at least, to celebrate the return 15 years ago of the former Portuguese-ruled territory to China and install its chief executive, Fernando Chui Sai-on, “reelected” for a second term in a process where there were no alternative candidates. Although Chui continues in office, changes are seen in his ministers and he is under pressure to help clean up the gambling business (assuming that is possible) and find ways of diversifying the economy. The political process was certainly one which appealed to Xi. Mainland officials have recently been contrasting Macau’s “good” behavior and almost non-existent politics with a Hong Kong wracked by pro-democracy protests. But Xi also arrived at a time when Macau’s main economic activity, gambling, is suffering a sudden and severe downturn caused by Xi’s campaign against corrupt officials and the use of Macau’s casinos as a means of avoiding China’s foreign exchange controls. Turnover is down by 20 percent or more from a year ago. Xi urged Macau to diversify its economy away from reliance on gambling.

But those remarks were simply a reminder of the two interlinked processes which have taken place in Macau sine the 1999 handover. First the enormous growth of the gambling industry thanks to the issue of many new casino licenses and the building of vast new, mostly wholly or partly foreign-owned, hotel/casino/ complexes to cater to mainland visitors. The majority of these visitors are small-stakes gamblers who may also spend freely on jewelry and watches. But what has driven Macau turnover to the largest in the world, still well exceeding Las Vegas, are the huge bets being placed by the VIP gamblers brought in by so-called “junket” operators and able to arrange transfers of large sums of money into and out of Macau.

The gambling boom and its linked construction and real estate surges has resulted in Macau’s Gross Domestic Product growing at one of the highest rates in the world. Its per capita GDP is now US$77,000, about double that of Hong Kong, and higher than Switzerland’s. The population has also grown rapidly to service the boom. Yet even a casual visitor to the territory can readily see that away from the gaudy casino complexes the standard of living is not high, housing for most is cramped, the air polluted, the traffic appalling and public services mediocre. Most of the wealth created by gambling has gone to the casino, hotel and luxury shop owners. Real wages have grown little and locals resent the influx of workers, whether the highly paid senior managers of the hotels and casinos or the mainlanders who compete for lower skill jobs.

The huge labor influx, which has increased the population by 200,000 to around 630,000 since 1999, also diluted Macanese and Cantonese identity.

Instead of feeling grateful for the economic boom, 20,000 citizens took to the streets earlier this year in an unprecedented May Day demonstration demanding higher wages. Since then, the Occupy movement in Hong Kong has struck a chord with many in Macau.

So China has a bred a monster in Macau with which Xi is trying to grapple. But how to make the city less dependent on gambling is another question. Macau has already been in effect gifted a neighboring island, Henqqin, where it is to develop a university campus and non-gambling tourist activities. But that is a slow and difficult process. Meanwhile Xi uttered vague threats about unspecified “foreign interference” which may well have referred to the foreign casino owners, who include the largest Las Vegas and Australian gambling groups, as well as to the forces supposedly behind Hong Kong’s Occupy movement.

If Xi is persistent in his attack on corruption and money laundering, Macau’s gambling turnover has a lot further yet to fall. Maybe the high rollers can be replaced by even greater numbers of smaller stakes players and mainland shoppers. But that remains to be seen. Meanwhile in what may be a particularly ominous move as far as Hong Kong as a financial center is concerned, the Economic Crimes Investigation Bureau of the Public Security Bureau is effectively to set up shop in Macau if order to keep close tabs on the high rollers. Beijing is also using the Union Pay card system it controls to try to track potentially illegal transfers.

That represents another erosion of the Two Systems principle, presented as an anticrime measure. But Xi has made no apologies for that. In his Macau address he underlined the need for policies in the SAR to conform to the needs of the nation at large and not place emphasis on Two Systems at the expense of One Country. There was a need for better “patriotic education,” meaning doing what Beijing believes is in its interest, to counter “external infiltration and interference”. In other words, the autonomy in domestic matters now only extends as far as Beijing deems acceptable. It is not a right.

Xi’s lecture was aimed at Hong Kong as much as Macau, and Hong Kong’s chief executive Leung Chun-ying was present to hear the lines he must repeat. But it remains to be seen whether the populations of either Macau or Hong Kong are listening. Or how they will respond if the Beijing policies which created booms in gambling (in Macau) and financial services (in Hong Kong) turn to busts.