Implication 2: VIP growth/monetary policy link
If there is in fact a relationship between China’s monetary policy and Macau’s gaming revenues, then investors in the gaming sector need to be aware of the risks that emerge as talk of monetary tightening in China increases.
Data shows a link between monetary policy and VIP revenues
Intuitively speaking, it makes sense that China’s monetary policy should affect Macau’s gaming revenues–particularly in the VIP segment, which is more reliant on credit and liquidity in China. Data is limited, given the infancy of Macau’s gaming market (and Chinese monetary data). The following chart shows a relationship (with a three month lag), for instance, it shows that Macau’s VIP gaming revenues were growing until 2Q08, after which they started to decline, together with shrinking money supply. Similarly, they have also shown strong growth as money supply has rebounded.
Although only briefly, the trends can also be seen in 3Q05 when money supply growth stagnated and was met with a decline in VIP gaming revenues for Macau. Similarly, we can see the trend in early 2007 when money supply growth rate stalled, as did VIP gaming revenues.
Quarterly data is not available prior to 2005; however, even on an annual basis, the trend is evident. For instance, in 2004, when money supply growth accelerated to 16% (from 10% in 2003), VIP gaming revenues grew by 34% in 2004. Similarly in 2005, when money supply growth retreated to 11% growth, gaming revenues declined by 3%.
We believe that as time has gone on, the sensitivity of Macau’s VIP gaming revenues to China’s money supply has intensified. This is largely because the majority of the VIP play in Macau is driven by credit, which in turn is driven by the junket’s ability to access formal or informal sources of financing in mainland China or to turnover assets in order to recover credit from customers.
Mass market does not seem to be as sensitive to monetary policy
However, the interesting point to note is that while the VIP segment seems to be sensitive to money supply, the mass market does not seem as sensitive. This is highlighted in the next chart, which shows that during the times when money supply has declined in China (namely 2007), mass-market revenues have stayed relatively flat (ie, not declined like VIP revenues).
We can see similar trends in 2005 where even after money supply slowed down, Macau’s mass-market revenues still increased by 57% on 2004. As explained above, we believe this phenomenon is driven by two factors:
- • The mass market is less reliant on credit and more reliant on the savings/earning power of consumers in China. Hence, money supply has less of a direct impact on their gambling habits.
- • Macau has not significantly penetrated the mass-market customer base in China. Hence, although some people may chose not to frequent casinos as economic resources wane, these will be replaced by other visitors who have not been to Macau and want to visit.
Recent decisions around monetary policy
The main policy changes that took place over the last one to two months and are pointing towards a tightening of China’s monetary policy include the following:
- • PBOC announced that banks in China are required to increase reserve ratios.
- • CBRC stated that banks could lend only a percentage of their monthly quota, after which they had to suspend lending for the month.
- • There has also been some talk of banks increasing the down payment requirements for some provinces, for example.
