Baccarat or Bank Deposits… Casinos Outperforming Banks?!
A recent front page report in the business section of the “South China Morning Post” describes the incredibly booming business conditions which Macau’s 33 casinos are enjoying.
上世纪70年代的澳门：一个宁静的沉睡天堂 / Macau in the 1970s: a quiet, sleepy haven
The opening line of the November 2nd article, “Casino Revenues Soar as Mainland Bank Deposit Rates Turn Negative” goes like this: “Baccarat tables appear to be offering a more attractive bet than the mainland’s negative bank deposit rates, as high-rolling gamblers pushed Macau’s casino revenues to a fresh record last month.”
It’s not clear whether this alleged link between the relative returns on Baccarat versus bank deposits is based on hard evidence, or just the reporter’s imagination. On the surface, comparing baccarat to bank deposits seems pretty wild — the kind of stuff you might expect from a clever casino marketer, or the rationalizing of a gambling addict.
The article goes on to report that due to the huge influx of mainland visitors during October, surrounding China’s “Golden Week” holiday, casino revenues surged 23% over the previous month and nearly 50% higher than October, 2009 levels.
Tiny Macau S.A.R., a mere 18 square miles in size, surpassed Las Vegas in gambling revenues in 2007. It has 33 casinos (up from just 11 in 2002) and a resident population of 542,000. Macau’s main businesses are tourism and gaming, as amply illustrated by the number of visitor arrivals in 2009: 21.7 million. That’s about 40 visitors per year for every local resident. The visitors spend a staggering amount on the gaming tables: US$13.73 billion in 2008. Actual plus forecast gambling volumes for 2010 are on track to break all records.
Macau has 4,770 gaming tables offering a varied array of gambling options, plus 14,363 slot machines. A walk through most of the casinos at any time of night or day sees them thronged with people, with mainlanders the most numerous by far.
From 1962 to 2002 gambling in Macau was administered as a monopoly granted to Stanley Ho’s organization, SJM Holdings. Beginning in 2002, the monopoly was ended, new licenses were issued, and an era of spectacular growth began. SJM has profited handsomely since they lost their 40-year old monopoly status. Their stock price is up 177% on the year to November 1.
The game of Baccarat earns far and away the highest share of revenues for the Macau casinos, and within that, the lion’s share is from VIP Baccarat rather than ordinary Baccarat. So a small percentage of gamblers are spending a huge percentage of the money, mostly concentrated in VIP Baccarat.
Metropolitan Las Vegas dwarfs Macau with its 1.9 million people and its sprawling 131 square mile footprint. But there’s no dwarfing the former Portuguese colony when it comes to money spent on gambling.
Macau became a Special Administrative Region of China in 1999, ending its stint as the first and last European colony in China. Naysayers who predicted a serious oversupply of hotel rooms and new casinos before and during the recent financial crisis, have been proven wrong so far.
Macau residents, while benefiting from the robust growth in tourism and gaming, also complain about overcrowding, traffic, and the disappearance of the former quiet, charming atmosphere of the place. With nearly 200,000 vehicles transporting people and goods on just 250 miles of road, you have a recipe for gridlock — some 800 vehicles per mile of road if all were to take to the streets at once.
But the dice roll on…
Meanwhile, the theory posed by the SCMP article is a novel one, and it goes something like this. Benchmark one-year deposit rates in China are currently set at 2.5%, which lags behind year-to-date inflation (through September this year) of 3.6%, so real interest rates on mainland bank deposits is a negative 1.1%.
The article goes on to say that a casino’s statistical advantage on the game of Baccarat suggests it should win 2.85% of all VIP chips wagered. As one of various incentives to high-rollers, casinos offer a rebate to them whether they win or lose. In the case of a 1% rebate, the high-roller’s expected loss rate then falls to 1.85%, which doesn’t compare too unfavorably with current mainland bank deposit rates.
Not to mention the fact that as a high-roller, you get free drinks, snacks, a nice hotel room, and VIP treatment, most of which is unavailable in your local bank branch.
I’m not a gambler, which is perhaps why I find this particular line of high-roller investment logic somewhat perplexing. I’d be less focused on the casino’s statistical advantage and more preoccupied with the probability of me losing my shirt, ending up with only my 1% rebate, the room key, and some stale snacks.
I guess high-rollers and low-rollers can probably understand each other’s gambling logic. As a no-roller myself, I just don’t get it. I wonder if there’s a high-roller training school out there somewhere? Maybe that’s what I would need to make it in roller-ville.
Meanwhile, I think I’d rather just bring some snacks and a bottle of mineral water with me next time I go to the bank.