Macau's Fine Line

(Bloomberg Gadfly) -- You'd be tempted to think it's party time again in Macau.

Gross gaming receipts rose for a 12th straight month, increasing 29 percent from the year before to 23 billion patacas ($2.9 billion), according to data released Tuesday by Macau's Gaming Inspection and Coordination Bureau.

The jump marks the Macau gaming industry's largest monthly gain since 2014, back when casinos were just starting to recover from a corruption crackdown by President Xi Jinping that restricted wealthy patrons keen to wager vast sums on baccarat tables.

The problem is, most of Macau's July revenue gain was driven by the high rollers who got Asia's gambling hub into trouble with Beijing in the first place. VIP revenue increased by 35 percent in the second quarter from a year ago, versus an 8.1 percent rise in mass-market revenue, the gaming bureau data show.

China blessed the casino industry when it gained control of Macau from Portugal in 1999. They were seen as a way to generate money for, and keep happy, residents of the Pearl River Delta, with the added benefit of being a place that mainland Chinese could gamble under Beijing's watchful eye. But Macau also created a problem, in the form of a massive capital flight.

It's a bit like when you were in high school and your parents wanted you to be social and make friends: When they finally allowed you to throw a house party, instead of the nice boys and girls from math class coming over to play board games, the trouble makers showed up carting sex, drugs and alcohol.

China granted prized casino concessions to U.S. companies such as Wynn Resorts Ltd. and Las Vegas Sands Corp. with the hope of transforming Macau into a family-friendly place for entertainment, shopping, concerts and conferences a la Las Vegas.

Instead, it got a casino industry overly reliant on VIP customers and the junket operators that funneled them. Rich mainland Chinese were playing baccarat not for pleasure but for the purpose of changing yuan into other currencies like Hong Kong dollars in order to evade Beijing's capital controls.

Macau's six concession holders have certainly made genuine overtures to show China they're serious about growing their recreational gambling business, including a new high-tech theater and central plaza planned for MGM China Holdings Ltd.'s latest Cotai property. And mass market did make up 42 percent of gaming revenue last quarter, up from 30 percent in the second quarter of 2012.

Macau Gaming Inspection and Coordination Bureau Director Paulo Martins Chan warned operators in May that the government would be persistent in its recreational push, and would be keeping a close eye on gaming licensees' diversification efforts.

But cash-minded businesses tend to follow the money. And if VIP numbers keep rising, the risk is that casinos revert to their addiction to high rollers and anger Chinese authorities in the process.

With casino concessions next up for grabs again in 2020, that could spell the end to the party altogether for gaming operators that haven't learned their lesson.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

1. Gambling remains illegal in mainland China, despite betting games like mahjong and unofficial lotteries and casinos being relatively popular. 

2. It's worth pointing out that casinos sometimes funnel VIPs into the mass-market category by including them in a new class developed in recent years called "mass premium."

To contact the author of this story: Shelly Banjo in Hong Kong at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.