Hainan would be no threat to Macau

Beijing is reportedly mulling opening another gambling jurisdiction in Hainan. Will they, won’t they, and if they do what will happen? First of all, the question is mostly irrelevant for the near term because by the time it happens, we’ll be in a different world. Even if tomorrow Beijing decided to start auctioning off Hainan licenses to casino firms, it would take at least 5 years for anything to really get off the ground. The financial world is moving so fast now that 5 years is an eternity.

Consider, 5 years ago was before the 2014 Macau crash, an event that has shaped the financial landscape of the province ever since. Before another 5 years passes you could have another one, and then we can discuss how an active Hainan gambling province might impact Macau at whatever level it’s at in 5 years.

Longer term though, the first thing to say is that competition is a good thing for all involved, so while losing a monopoly on a territory may sound scary for the beneficiaries of that monopoly, ultimately monopolies poison companies and make them lazy, inefficient, and eventually bankrupt. For the most recent example, look at the Puerto Rico Electric Power Authority (PREPA). It’s hard to think of a more inept company with a monopoly over an entire service in a given territory. After failing to get the lights on in Puerto Rico nearly 5 months after Hurricane Maria, the firm is finally being privatized. The modern story of bankrupt monopolies goes all the way back to the British East India Company, which caused some serious famines in Bengal, India before it went bankrupt in the 19th century.

Competition for Macau already exists though in any case. It’s just that this competition is from other countries, so like it or not Macau does have to compete. The question for Beijing is whether Macau will compete against a jurisdiction where Beijing also has taxing authority, or will it compete against a foreign one? Some argue that Beijing will not allow gambling in Hainan because gambling goes against the ideology of communism. This is a silly argument. There is no communist ideology. There is just the drive for wealth, which can either be satisfied through liberty and free markets, which tends to benefit everyone, or through top-down central planning, which tends to benefit cronies and the politically connected at the expense of everyone else. In almost all countries there is a mix of both, in different degrees. No politician runs an economy according to ideology. They run it according to what will get them the most money and votes.

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