INSIDE ASIAN GAMING | October 2012 2 Editorial Inside Asian Gaming is published by Must Read Publications Ltd 8J Ed. Comercial Si Toi 619 Avenida da Praia Grande Macau Tel: (853) 2832 9980 For subscription enquiries, please email
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[email protected] The Big Affluence China is looking at its slowest year of economic growth in more than a decade, but you wouldn’t know it from the number of mainland residents traveling abroad—39 million in the first half alone, about double the number of five years ago, a market that Digital Luxury Group, a Geneva-based research firm that monitors high-end spending, estimates in total to be worth some US$232 billion. Of course, travel isn’t the only indicator of the growing size and strength of China’s new consumer class, but it’s a pretty good one. In fact, if the country’s average annual income were to hit US$15,000, airlines could see 1 billion extra travelers in 10 years, according to the International Air Travel Association. But incomes have a ways to go to get there. In the state-owned firms that dominate the economy, the average annual wage last year was 42,452 yuan, or about US$6,700, compared to $39,959 in the United States, according to data cited in a recent CNBC report. In the private sector, which actually generates about 75% of the jobs, it was even lower, at 24,556 yuan. Among other things, this speaks directly to the huge divide between the country’s super-rich, which describes many of the people who have been driving the stupendous top-line growth in Macau’s casino industry in the years since liberalization, and everybody else. It also explains in large part why domestic consumption lags well behind the major economies of theWest as a percentage of GDP, accounting for less than half of it—and why consumption hasn’t reached the point where it’s a major factor in GDP growth. It’s true that consumer spending has been experiencing double- digit growth for a decade, yet economically significant consumption is still confined to about 10- 15% of the population, according to experts. Only about 6% of households have annual incomes of $16,000 to $34,000, the threshold global management consultants McKinsey & Co. uses to define “mainstream” consumer. All of which is the same as saying that too much wealth remains concentrated in too few hands. “In general,” says an economist with Asian Development Bank, “economies where consumption plays a meaningful role as a driver of growth entail a wide middle class that on average comprises about 70-80% of the population.” Macau’s casinos, as we know, have flourished as an outgrowth of this great divide, with about 70% of gaming revenue generated by an elite of very large bettors, most of them coming from the mainland, and principally from neighboring Guangzhou Province, one of the richest and most populous and most urbanized centers of China’s export-dominated economy. The problemwith this model is that as the country’s growth has slowed—going on six straight quarters through Q2 2012, with a recent Reuters poll forecasting 8% this year, down from 9.2% in 2011 and well below the 10% average of the last three decades—so has the patronage in Macau’s VIP rooms. Global demand for China’s exports has slackened, an overheated domestic property market is succumbing to the inevitable frost, and growth has followed both of these indicators down. The average wealth of the mainland’s richest citizens dropped 9% year on year in 2011, a year that saw the Shanghai Stock Exchange plunge 20%. This was also when softness in VIP revenue growth first became apparent. Through August of this year, the SSE was down 8%, and this year, for the first time since 1999, income from property has fallen behind manufacturing as the No. 1 source of wealth. Obviously, a more equitable distribution of the country’s vast wherewithal would make for a more balanced and healthier economy, not to mention a more profitable casino industry. (For more on this, see “Critical Mass,” this month’s cover story.) Fortunately, events are trending that way. CLSA, for one, believes China presents “the world’s best consumption story,” pointing to wages that have been growing for the last decade at double- digit rates on average, supported by a government-imposed minimum raise of 13% a year which lasts at least through 2015. The World Bank forecasts per capita income rising to $16,000 by 2030, at which point it says domestic consumption will account for two-thirds of the country’s economic activity. Based on McKinsey’s annual surveys, by 2020 there will be 167 million “mainstream” consumer households—more than 10 times the current number—and another 120 million households with $6,000-$15,000 of spending power. For Macau, this should translate into a broader mix of gamblers, not to mention more non- gambling spend. But to fully leverage it the massive capital investment that is transforming the city as a regional destination must be matched by a greater ability to reach the millions upon millions of Chinese beyond Guangzhou. This is why, and rightly so, such high hopes attend the improvements under way in the territory’s rail, road and ferry links to the mainland, a process to which further expansions of the PRC’s internal rules governing individual travel will be a necessary complement. The quicker the better, too. For affluence is not only on the march in China, it may be arriving faster than we think.