Rocky Road Ahead for China’s Gambling Industry

China’s online gambling industry is rushing headlong into trouble as economic uncertainties grow. Fears of coronavirus and slow economic growth, combined with a crackdown on capital outflow mean troubling times ahead.

Earlier this year, China identified the flow of capital via online gambling websites as a risk to national security. They believe that the Chinese economy is being negatively affected by the outflow of capital through online casinos.

As China starts to crack down on the financial facilities used by the Chinese online gambling industry, thousands of people have been arrested and financial channels closed.

According to officials, government authorities have seized more than 200bn+ yuan (more than £22bn) and frozen thousands of bank accounts.

It comes as part of a broader crackdown on gambling, which includes anti-gambling propaganda, as well as the widespread arrests and bank account freezes.

Those working within in the Macau casinos, including casino owners and junket executives, are critical of the latest move. They say it’s affecting liquidity and reducing revenue because high-rollers are staying away from the resort and online gambling.

Gambling is illegal throughout China, except in Macau. However, many gamblers in other parts of China use online gambling as a means to circumvent these laws, choosing to gamble via Philippine-based online casinos.

What Are Junkets? Why Are They Relevant?

We don’t have junkets in the West, so it can be difficult for us to understand their role within the Chinese gambling industry. Junkets are financial entities that bankroll VIP high-rollers. They lend money to, and provide financial facilities for, super-rich Chinese gamblers. They also act as middlemen between the casinos and VIP high rollers, luring gamblers to both the Macau casinos and the online casinos.

The junkets offer gamblers luxuries – e.g. world-class accommodation, dedicated waitresses, the full VIP experience – and large amounts of capital to attract the high rollers to the casinos. The casinos, in turn, pay the junkets a commission.

The casinos rely on the junkets to bring in the high rollers. At one point, junkets accounted for as much as 80% of Macau’s revenue. Nowadays, it’s less, and Macau generates significant revenue from tourists. Nonetheless, junkets are important to Macau and continue to generate an estimated 50% of its revenue.

Why The Government Cracking Down On Junkets

The government isn’t cracking down on junkets per se. It’s cracking down on financial entities that it can’t control. And, because junkets skirt the edge of legality the Chinese authorities view some practices as susceptible to money laundering. They’re targeting the practices rather than the specific entities.

It’s not so much the junket executives that are the issue, but their high-level customers who use their facilities to provide credit and call in debts from high rollers.

In focusing on the practices that junkets use, China believes it can gain better oversight of the Macau casinos and stop online gambling in China. Ultimately, the aim is to prevent people from laundering money out of the Chinese economy.

Fall Out In The Gambling World

Following the arrests and rumours of a further crackdown, high rollers have started withdrawing money from various junket operators. Images of investors queuing to withdraw their cash were posted to WeChat, China’s biggest social media messaging platform.

The crackdown is likely to have a significant effect on China’s VIP gambling industry. With high rollers accounting for so much revenue, it may fall to the Macau casinos to open lines of credit themselves if they want to survive the triple whammy of coronavirus, slow economic growth, and government crackdowns.

Picture of Chinese city to represent China. It might not be the gambling mecca Macau