Macau’s Big Gamble

Even as foreign investors pour billions into ever-glitzier casinos, the tiny peninsula’s bid to become the Vegas of the Orient depends on China’s larger willingness to embrace transparency and the rule of law.

If you were an economist, you might be interested in Macau’s test of the hypothesis that everyone who gets into the casino business wins, not just the industry’s Men of Vision, like Adelson and Wynn. This is “win” in the casino sense, of course—that is, they end up with the money the customers lose.

The gambling business is unusual because of what analysts call its “supply driven” nature: The more places and ways there are to bet money, the more money people will bet. In many businesses, success for a new competitor means a defeat for those already there. In minor ways, this appears to be true even in Macau. Stanley Ho does not enjoy the monopoly he did a decade ago; as casinos add new tables, the win per table overall goes down. Some financiers worry that in the short term Macau may be adding too many gambling sites too fast.

But in the largest sense, the pie of gambling revenue grows and grows, so there’s more for all. Macau’s gambling win is bigger than that of Las Vegas—and Las Vegas is now adding capacity faster than it ever has before. (Macau also imposes a tax of up to 40 percent on casino earnings, far higher than in most U.S. states.) Fifty years ago, no U.S. state had a lottery; now, 42 states do. “People would always ask, ‘Will Atlantic City hurt Vegas?” Zarnett, of Deutsche Bank, said to me. “What about Indian gaming? Or the riverboats? They all came, and Las Vegas continued to grow. Macau won’t hurt. Nothing hurts. New supply is always absorbed.”

Some animals, given all the food they want, will eat practically until they burst; others eat only until they reach a certain size. I asked I. Nelson Rose, a professor at Whittier Law School who has written many books about the industry, whether any society offered evidence that at some point people would have spent “enough” on gambling. He said that specific areas, including Macau, could become over-casinoed, but that a sustained worldwide surge in demand for gambling seems to be under way. And even if there is a theoretical limit, for now the potential for Asia is limitless. The 300 million people of the United States spend about $50 billion a year on gambling. Frank Fahrenkopf, head of the American Gaming Association, points out that within a five-hour flight of Macau live more than 3 billion people, who together now spend only about $12 billion. Supply will bring demand.

If you were a gambling-equipment supplier, you would be interested in knowing whether Macau’s casinos were going to make the “tables to slots” shift anytime soon. For anyone familiar with an American casino, the first glance inside the Grand Lisboa or even the Sands Macao is startling. To begin with, it’s (relatively) quiet. China in general is as noisy as American casinos, but Chinese casinos are surprisingly hushed. Perhaps that’s because there’s practically no alcohol; attendants walk around with trays of free drinks, but the drinks are water, tea, milk, fruit juice. (The Chinese theory is that placing bets requires full concentration, and gamblers don’t want to dull their senses or skills.) But mainly it’s quiet because there are practically no slot machines to whoop-whoop and clunk out coins when someone wins. In Las Vegas, slots account for roughly 60 percent of the total casino win; in Macau, roughly 5 percent. Catherine Burns, vice president of marketing for the Bally slot-machine company, pointed out at the G2E conference that the total number of slots in Macau is about the same as at the Mohegan Sun, in Connecticut. What Macau’s casinos have instead are “table games”: not blackjack, craps, or poker—all of limited interest so far to Chinese gamblers—but roulette, a dice game called da xiao (“big-little”), and most of all, baccarat. Felt-covered tables for baccarat occupy most of Macau’s gambling space.

Customers will be wedged six-deep around one table, while dealers stand idle at the neighboring two. This pattern arises, I was told, from the widespread belief among Chinese gamblers that there are “hot” and “cold” tables, and much of the skill in gambling involves telling them apart. (The clustering of other gamblers around a table is one clue.) This leads to the question that might interest you if you were an anthropologist—or a potential investor in Macau: Is there a distinctively Chinese attitude toward games of chance?

Nearly all customers in Macau are ethnically Chinese. They come in roughly equal shares from the mainland, Hong Kong, and Chinese communities in Southeast Asia. “Do Chinese like gambling more than other people?” asked Ivan Yiu at the conference in Macau. Yiu, himself Chinese, is the coordinator of addiction services for a group of hospitals in Hong Kong. His answer was yes. I have seen many sociological studies that support that view. Here is one of Yiu’s pieces of evidence: In the United States, the overall rate of “pathological gambling” is 1.8 percent; for Chinese Americans and Chinese immigrants, it is about 3 percent. The variation, Yiu said, involves cultural characteristics and assumptions. Some of these may sound familiar to people who have seen or known problem gamblers of any background: a “lack of probabilistic thinking,” a belief that a player’s skill can surmount the odds (even in baccarat and roulette, which involve no skill beyond laying down a bet), the “delusion that one can foresee results by intuition and control results by ritual.” The main difference, Yiu said, is that in Chinese cultures, a larger proportion of people think this way. One other, more distinctive factor is a traditional belief that money won in gambling is as respectable as money earned any other way. According to Yiu, a gambler who has a good run at the roulette table will be just as esteemed as, say, Warren Buffet, with allowances for difference of scale.

With the concept of respectability, we arrive at political values, regulation, and international law. If you were curious about the broad noneconomic effects of China’s economic rise, you would be watching the struggle over Macau’s “VIP rooms” as a proxy for larger questions about China’s adherence to “universal values.”

Stanley Ho’s four-decade monopoly on all casino business might seem the strangest part of Macau’s economic structure. It was not: That distinction has belonged to the related system of VIP rooms, which has also been the foundation of Macau’s gambling economy—and which poses the greatest challenge to Macau’s ability to come into sync with international norms.

The most recent and authoritative academic study of the topic is “The VIP-Room Contractual System and Macao’s Traditional Casino Industry,” forthcoming from William Eadington, a prominent economist and director of the Institute for the Study of Gambling at the University of Nevada, Reno, and Wuyi Wang, of the Macau Polytechnic Institute. They write that the system arose from a quirk in Macau’s location and logistics. In the 1970s, most of the customers came from Hong Kong by ferry, but there were never enough seats to satisfy demand. Scalpers moved in, buying up ferry tickets at face value and selling them for a profit. Stanley Ho believed this was bad for Macau’s casinos and for the ferry, which he also owned, so he proposed a grand compromise: If the scalpers would move out of the ferry terminals, and presumably keep replacements from moving in, he would let them participate in gambling operations in special areas inside his casinos, which could be much more lucrative. Over time, the arrangement evolved into a way to increase the profits of Ho’s casinos while subcontracting much of the work of dealing with customers to a group of shady touts.

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James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.

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