Never underestimate Chinese paranoia. The degree to which the Chinese government can shoot itself in the foot has no bounds. Give them a reason to be paranoid and they’ll take it to the umpteenth degree to suffocate themselves in a furor. Imagine preparing for a moderate hurricane by not only putting up shutters, but by erecting an adamantium fortress with lookouts armed with tactical nuclear missiles instructed to unload all munitions if they see an ant carrying a piece of sawdust that looks suspiciously large when viewed under an electron microscope.
Donald Trump is certainly enough reason for the Chinese government to exhibit some form of healthy paranoia. I would too if I were in charge of the People’s Republic. But the more bellicose Trump gets, the more China will lock itself down and suffocate its own economy.
A piece from Bloomberg came out last week warning of danger in Macau stocks. This is true, there is danger, and much of the analysis is spot on. It focuses on the possibility of oversupply – and in a country full of real estate ghost towns this is actually quite likely – to copious bets on call options, to price to earnings ratios being 10% higher than they were at the 2014 peak. This is all true, but it misses the central point of why Macau is so dangerous particularly now.
The Bloomberg piece starts out with this paragraph (emphasis mine):
The last time investors were this optimistic about Macau casino stocks, it didn’t end well. Back then, in 2014, bulls misread a Chinese anti-corruption campaign that scared away high rollers and erased US$146 billion of shareholder value. Now, as casinos rebound on hopes that small-time gamblers and tourists will fill the void, some of the same signs of unbridled investor enthusiasm are flaring up again.
The two bolded clauses are the main point. The rest is interesting fluff. Unfortunately the article continues to delve into the fluff rather than the main threat. The main reason why Macau is so dangerous particularly now is not because of P/E ratios or unbridled investor enthusiasm or a danger of oversupply. It is, once again, a bullish misread of Chinese government crackdowns and false hope that small-time gamblers and tourists will fill the void.
Earlier this month the Chinese government decided to take the fingerprints of every foreign tourist that crosses its borders. The Chinese Ministry of Public Security has “insisted” that the measure will not delay entry and exit into and out of the country. If that’s the first thing they insist, you can bet that it definitely will cause delays and harship. Why are they doing this? To metaquote The Dude, “In the parlance of our times,” they have been “triggered” by Trump into being more paranoid. And the most important thing to understand is that when the Chinese government decides to go in one direction, they go big in that direction.
When they decide to build a wall, they don’t just build a wall. They build a wall. When they decide to go communist, they don’t just go communist. They go full communist to the point of killing a tenth of their entire population, which itself is the largest in the world. So when Beijing decides to spearhead an anti-corruption campaign, you can bet it will be much bigger and much more consequential than any Macau bulls would expect. And this is exactly what happened. VIP gambling has been pretty much destroyed and has not recovered, and now while investors hope that small time gamblers and tourists will fill the void, Beijing has decided to fingerprint every single tourist at the border. This will not encourage tourists to fill the void. It will encourage tourists to stay far away. Personally, if I was ever considering visiting Macau to see what it’s like, there is no chance I am ever going to go there now if I have to give the Chinese government my prints in order to get there.
The more Trump triggers them, the worse business will get. And as of last week, the aircraft carrier USS Carl Vinson is on its way to the South China Sea in a game of chicken to see how close it can sail to disputed islands that the Chinese government claims as its own. If there is any kind of altercation in the next few days or weeks, the next move could easily be a heavy tariff on all imported Chinese goods into the United States. Imagine what they will do to Macau’s local clientele, those who make their living exporting goods into the United States. It won’t be pretty.
It’s hard to know how much the Chinese authorities understand about their leverage over Trump, namely that they do not have to fire a single shot in order to repel the USS Carl Vinson. All they really have to do is hit the “sell at market” button on their trillion dollar horde of US Treasuries all at once and the USS Carl Vinson would not be able to afford the fuel it needs to sail back to America. If they do this, the PBOC would lose some money, perhaps half a trillion, but the value of the Yuan would skyrocket and perhaps double the purchasing power of the average Chinese citizen, who would then go to Macau to party hard like it was March 2014. And the United States would be basically bankrupted overnight with the value of the dollar plummeting through the floor.
This is a doomsday scenario and probably will not happen, but the point is, by the numbers it could. Given who has what assets and how much of them, it could happen if only the decision were made to just do it. If it is, then that would be the time to buy the Macau dip.
