China’s new grey cash crackdown to hurt Macau VIP: DB
A fresh crackdown at central government level and in Macau on so-called ‘underground banking’ – some of which enables money to move cross border from mainland China – could have a further negative effect on Macau’s beleaguered high-stakes gambling segment, said a note from Deutsche Bank AG in Hong Kong.
On Monday, Macau police arrested 17 people in raids on five Macau pawnshops thought to be using China UnionPay Ltd point-of-sale (POS) terminals illegally in order to get cash out of the mainland.
“Many Macau junkets use the underground banking network to transfer money between Macau and China. As such, we see risks that junket liquidity may further tighten. Galaxy [Entertainment Group Ltd] and Wynn Macau [Ltd] may be the most impacted given their high exposure to VIP (27 percent to 29 percent of EBITDA),” wrote Deutsche Bank analyst Karen Tang in a note following the news and other official announcements within China. She was referring latterly to casino earnings before interest, taxation, depreciation and amortisation.
Ms Tang added: “We think this campaign is the result of China’s efforts to control capital outflows, especially after the recent renminbi depreciation.”
On Monday, China’s Ministry of Public Security said that nationwide, illegal financing in the markets and money laundering were being targeted in an operation that would last until late November.
The Monday announcement, published on the Ministry’s official website, quoted Deputy Minister of Public Security Meng Qingfeng as urging security units throughout the country to work more closely with the central bank and the State Administration of Foreign Exchange to identify wrongdoing.
“Some ‘grey funds’ have been transferred through underground money shops across the border, which not only poses a serious risk to our foreign exchange management but also disturbs the order of financial and capital markets and threatens our financial safety,” Mr Meng was quoted as saying on the Ministry of Public Security’s website.
JP Morgan analysts estimated in a note in July that China saw capital outflows of about US$340 billion in the year to end-June, with approximately US$142 billion leaving the country in the second quarter of 2015.
Deutsche Bank’s Ms Tang commented in her note: “In April, the Chinese authorities launched a campaign to crack down on illegal fund transfers through offshore companies and underground banks. To date, 66 illegal financial institutions have been busted, and over 160 suspects have been arrested, involving up to RMB430 billion [US$53 billion].”
She added: “For the next stage of the campaign, the authorities are to focus on: i) identifying targets to analyse evidence; ii) setting up special forces to prioritise and expedite important cases; iii) identifying upstream crimes, especially for financial crimes, corruption and terrorism; and vi) strengthening public awareness of how the underground banking network operates, and encouraging the public to use regulated channels for financial service.”
Customer sentiment
A spokesman for Macau’s Judiciary Police on Tuesday said that 4,549 transactions with a total value of MOP354.7 million (US$44.4 million) had been made on the 11 POS terminals seized in Monday’s Macau raids. The police said as a result of the transactions, the Hong Kong operation of China UnionPay had incurred a HKD710,000 (US$91,600) loss.
In January Macau police arrested four people for allegedly using misregistered China UnionPay terminals. In that case the devices had allegedly been tampered with so that the UnionPay network identified them as being registered and operated in mainland China, where transaction fees charged by the China UnionPay system are much lower than in Macau.
On Friday, China’s central lender, the People’s Bank of China, announced on its website that it had signed a memorandum of understanding to cooperate with the Monetary Authority of Macao on anti-money-laundering work.
In a press release on Tuesday, the Monetary Authority of Macao said the implementation of the pact “shall further enhance and strengthen the management of the prevailing supervisory system to prevent the activities of money laundering and terrorist financing in the financial sector of the Macao SAR.”
Analysts at Daiwa Securities Group Inc said the move was “another incremental negative on Macau’s liquidity environment”.
“While the exact extent of these crackdowns is difficult to quantify, our ground checks point to a direct impact on customer sentiment and business volumes,” analysts Jamie Soo, Adrian Chan and Jennifer Wu said in a note on Monday.
The Daiwa team said the “purported UnionPay-related clampdowns” had already resulted in a “50 percent to 80 percent decline in UnionPay transaction volumes since its peak in first quarter 2014”. They added that jewellery and pawnshop operators in Macau have suggested that the slowdown “is due mainly to customers’ concerns over the reported government scrutiny of overseas transactions, especially in Macau.”
“This liquidity risk further dampens the [gaming] sector’s GGR [gross gaming revenue] outlook and presents just one more reason to avoid the sector, in our view,” they added.
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