Macau’s Path to Economic Diversification

Posted by Reading Time: 4 minutes

By Yao Lu

Oct. 22 – The free flow of goods and services, money and capital has turned Macau into one of the most liberal trading regimes in the world. This free trade approach is of vital importance to the region’s economic survival as it boasts limited natural resources and a very small domestic market.

Economic development

Since the liberalization of its gaming sector in 2002, Macau’s economy has expanded rapidly with significant investment in new hotels, casinos and convention facilities by developers from Hong Kong, Australia, and the United States. In 2011, the region’s GDP expanded by 20.7 percent in real terms to MOP292.1 billion, with a 41.9 percent increase in gross gaming revenue and a 79.4 percent surge in public investment.

However, with the global economic downturn, the city only reported a 7.3 percent year-on-year GDP increase in real terms in the second quarter of 2012, after 12.6 percent growth in the first quarter. This slowdown was mainly due to a deceleration in gaming services, total visitor spending and investment. Gambling has been especially affected, and revenue in May registered a 7.3 percent increase, the slowest growth rate witnessed since July 2009.

Macau’s gaming industry

Since being legalized in the 1850s, gaming has always been an important source of revenue for the government, and from 2000 onwards, direct tax on gambling accounts for well over half of the total government revenue. Having surpassed Las Vegas in 2006, the city now represents the world’s largest gaming capital. Last year, gaming revenue in Macau rose by 41.9 percent, reaching MOP267.87 billion, more than five times the gaming revenue of the Las Vegas Strip.

Why economic diversification?

The monopoly status of the gaming industry in the economy presents an unstable factor to the sustainable development of Macau. The fast expansion of the industry has gathered a great deal of production resources, thereby squeezing the development space of other industries; for example, of the region’s 321,000-strong work force, 24.8 percent of them are employed in the gaming industry. Rapid development of the gaming industry and a shrinking of none-gaming industries has increased the region’s dependence on casino revenue, leaving the whole economy incredibly fragile.

The spread of H1N1 flu in 2009 is a good example, where the downward slide in tourist arrivals caused by the flu seriously impacted Macau’s gaming industry and in the first quarter of 2009, the region witnessed a decline of 12.9 percent in GDP growth. Moreover, as the city’s gambling business is heavily dependent on tourists from the Mainland China, any hiccup in China’s economy is likely to have a direct adverse impact on the region’s economy.

This over-reliance on the gaming industry has made the Chinese central government worried about the city’s sustainable development. During Chinese Premier Wen Jiabao’s visit to Macau in 2010, he warned the region not to rely on the gaming industry, and in his meeting with the region’s chief executive a year later, he suggested that the local government should prepare a strategic plan to diversify the region’s economy. Ever since then, economic diversification has become the overlying direction of the region’s economic development.

Spotlight on Hengqin

The Hengqin Project was first brought to the table in January 2009 by Chinese Vice President Xi Jinping, who is convinced that the development of Hengqin Island will provide new areas for development and diversification within Macau’s economy. This view is echoed by the present chief executive of Macau, who highlighted that making use of the Hengqin Development Zone and expanding cooperation with neighboring regions can help to diversify the local economy.

As Macau is quite small in size, the government is thinking about ways to expand the scope of attraction outside its current domain. As“China’s southern door to the world,” Hengqin triples Macau in size, providing the city with the necessary space to build facilities that are essential for leisure tourism, such as wetland parks and theme parks, as well as new resorts and hotels closer to nature. Hengqin will also offer many precious opportunities to small and medium-sized enterprises, especially in the areas of medical science and innovative industries. A formal document titled the “Administrative Measures on Registration of Hengqin Zhuhai Special Commercial and Economic Zone” has been promulgated to create a better business environment by simplifying registration formalities.

Tough road ahead

The road to develop a diversified economy will be long and difficult. Construction of proper infrastructure in Hengqin may take decades and other elements, such as adequate transport capacity, need to be completed in the coming decade before the region can really diversify away from its existing gaming-based economy. Moreover, as the gaming industry is already making a large amount of profit, investors’ willingness to invest in new areas appears to be fairly low. However, as long as economic development heads in the right direction, Macau will eventually get there.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.

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