Casinos made Macau one of the wealthiest places in the world — but they also brought heightened inequality and crime. Now, China is cracking down.

At 32 square kilometers, Macau is just 5% of Singapore's size. It's about half the size of Manhattan. Yet it has more than 35,000 hotel rooms, 30 Michelin-star restaurants, and 25 UNESCO World Heritage Sites. And it clocks gaming revenues that are six times that of the Las Vegas Strip.

It's also one of the wealthiest places in the world.

Alidad Tash is an expert in gaming operation and strategy who worked for 10 years in Vegas and Macau with the Sands organization. He said Macau's gaming revenue was $36 billion in pre-pandemic 2019, while the Vegas Strip raked in just $6 billion.

"Gaming is 70-80% of Macau's GDP. It's shockingly high," said Tash, who now runs his own consultancy firm, 2NT8 Macau.

But the wealth rests in the hands of a few — and that, in turn, is at odds with the government's "common prosperity" messaging. In September, officials announced a regulatory overhaul. Gaming licenses in Macau expire in June 2022.

The timing of the announcement is in line with Beijing's regulatory crackdowns, and it means gaming operators will have to abide by new rules or risk losing their licenses. There were also hints of Chinese officials supervising the world's largest gambling hub. All this caused shares of casino companies, particularly American operators Sands China and Wynn Macau, to plunge.

Getting Macau to amp up the non-gaming elements of the island will be a challenge, according to casino development strategists and hospitality consultants Insider spoke to. For one, Macau is tiny. But mainly, it's a victim of its own success for focusing on gaming as its sole cash cow.

More money, but not for everyone

Victoria Fuh is the vice president of Macau Meetings, Incentives and Special Events Association. Fuh told Insider that when she arrived in Macau 16 years ago, most meeting planners didn't know where Macau was. Today, it's on the list of venue options for international conferences that rotate globally.

"Year after year, Macau adds new hotels and attractions, so it's always fresh for our clients," said Fuh.

Since 1962, Stanley Ho — the late "King of Macau" — and his family held a monopoly over Macau's gambling industry as the only licensee for casinos. When Macau broke the monopoly in 2002, five more casino operators entered: Sands China, Wynn Macau, Galaxy Entertainment, Melco Entertainment, and MGM China. Collectively, they now operate 41 casinos.

With the casinos came a lot of money. Macau is the only place in China where gambling is legal, and casinos have had a strong 20-year run.

"Macau's GDP per capita shot up from a low of $12,352 in 1992 to $71,974 in 2020," said Ben Lee, managing partner of IGamiX Management & Consulting. "However, most of that wealth is concentrated in the hands of a few."

The government started a one-off annual cash handout to residents in 2008. In 2020, the amount allocated to residents was 15,000 patacas ($1,870).

Lee, who has lived in Macau for 16 years, told Insider the annual lump sum is "nominal."

"China sees how this creates social problems in Hong Kong and probably wants to avoid the same outcome in Macau," Lee added.

Were it not for subsidies and welfare benefits like these, Macau's Gini coefficient — which is used to measure inequality — would have been 0.4% in 2017-2018, hitting the high inequality mark, according to the 2020 Statistics and Census Bureau survey as reported by Macau Business.

And while the government reports a low poverty rate — 2.3% in 2017 — the percentage is based solely on income and ignores the growing cost of living that accompanied the casino boom.

Wealth inequality isn't the only issue in Macau. For one, there's crime: According to a paper from the Macao Institute for Tourism Studies, since the liberalization of casino licensing in 2002, crime has "increased drastically."

There are other social problems, such as a whole generation of young people dropping out of studies to work in the gaming industry because of its financial rewards, according to Robbert van der Mass, director of APAC Hospitality Services Macau. This in turn affects small retail shops and restaurants, many of which have disappeared as they couldn't compete with salaries offered at casino resorts.

One-trick pony

Macau is well positioned for tourism: At its feet is the massive mainland market and neighboring Hong Kong, which together accounted for 90% of Macau's 39 million arrivals in pre-pandemic 2019, Macau Statistics & Census Service, locally known as DSEC, shows.

In 2019, there were 60 times more tourists than locals in Macau, per DSEC figures. But the average length of stay in Macau is just 1.2 days, compared with 2.7 days in Singapore and 3.3 days in Hong Kong. That's partly due to a high number of day-trippers, which accounted for 53% of arrivals in 2019, DSEC data shows.

Macau's gaming liberalization in 2002 was meant to make the city a world center for tourism, while Hong Kong became an international financial center, said Lee. That didn't exactly happen.

"Instead, Macau became China's center for gambling," Lee said. "And despite the anti-corruption campaign [in 2012] and a series of anti-gambling edicts subsequently, casinos' non-gaming revenue never really got off to any significant volume, staying at about 5% of their gross revenue on average."

This compares with 50% in Vegas and 30% in Singapore, experts interviewed said.

However, non-gaming creates more jobs than gaming does — and it benefits small- and medium-sized suppliers more, said some of the experts.

"When casinos make money, no supplier gets rich," said Tash. "If I spend money in a hotel room, there is a lot more labor involved. Non-gaming supplies wealth for the overall community far more than gaming."

Keeping Macau relevant

With its gaming licenses expiring in eight months, Macau now has a chance to reframe its gaming history.

"This isn't a renewal, it's a new open tender and anyone can bid for a new concession," said Lee. He said the government will likely offer prescriptive terms and demand clear non-gaming plans that extend beyond restaurants and retail.

"They want to see real non-gaming, such as the development of meetings and conventions, entertainment, art, and other attractions that go towards building a healthy tourism industry," Lee said of the government's approach to Macau 2.0.

A shift to more non-gaming could be beneficial for Macau tourism, said some of the tourism experts Insider spoke to. Some even see it as a chance for the city to redefine itself in line with newer travel trends.

Van der Mass of APAC Hospitality Services opened the MGM Grand Macau in 2007. He said that over the years, he has noticed a "huge shift" in Chinese travelers' behavior towards culture and experiences in food, retail, and entertainment.

"Integrated resorts are under pressure to adapt their offerings here in Asia, because these customers are increasingly exposed to leading trends in the world. To build more retail and meeting facilities without evolving these segments is no longer acceptable," said van der Mass.

Macau is facing increased competition for Asian customers as the gaming industry develops elsewhere in countries such as Japan, South Korea, and the Philippines, he said.

The demographics of gaming travelers are also changing. "Younger travelers are inclined towards gaming online, and the pandemic only drives more of this behavior. I think we'll see a transition in Asia towards more non-gaming," said Ian Wilson, who worked six years at Marina Bay Sands in Singapore and now runs Wilson Innovation Lab.

Attempts at moving beyond gaming

Casino operators in Macau appear to be heeding the push for more non-gaming.

Sands runs two casino resorts in Macau: The Venetian and The Parisian. The Venetian is the largest casino floor in Asia. Sands also tries to attract leisure visitors with attractions like Venice's canals and a replica of the Eiffel Tower. It's now remodeling the former Sands Cotai Central into a new resort called The Londoner, which will include replicas of London landmarks like the Houses of Parliament, Big Ben, and London-themed suites by David Beckham at one of the four hotel towers.

The project, opening in phases this year, has 351,000 square feet of gaming space and 369,000 square feet of meeting space. That's in addition to a 1,700-seat theater and enough retail space to fit 130 stores and 40 restaurants.

While the move does reflect a diversification out of gaming, it does not address another missing element in the island's development: Macau's Euro-Asia history and heritage.

"Gaming has overshadowed the development of other potential attractions and eclipsed some of the original character of Macau, such as its Euro-Asian heritage, in both tangible and intangible forms," said Leonardo Dioko, a professor at Macao Institute for Tourism Studies and a director of a tourism research center in Macau.

A thinly veiled power play

Some skeptics believe the regulatory overhaul is a thinly veiled power play for China to gain more control over the yuan's outflow and to strong-arm Macau — and the casinos — into adopting a digital currency, which is traceable.

"It's no coincidence that the target date for the implementation of the PRC digital yuan is 2024. China just wants to make sure that Macau is ready for the conversion when China wants it to be," said Ben Hirasawa, founder of BH21, a firm that advises hospitality and real-estate clients on project development in Asia.

While the review's timing may be opportune for China, it's a setback for Macau tourism, which has been battered by the pandemic. In the first nine months of 2021, Macau had six million arrivals, a fraction of its 39 million visitors in 2019, according to DSEC.

"Although there have been times throughout the year where we can see a glimmer of hope and travel recovering, it swiftly changes when there is an outbreak somewhere close by or locally," said Janet McNab, who heads Sheraton Grand and St Regis in Macau.

Ultimately, what's at stake is the entire infrastructure upon which Macau's success, unequal though it is, has been built. What's also in question is whether the niche it carved out for itself 20 years ago as Asia's gambling haven will still exist.

"Macau kind of exists for gaming," Wilson said. "But with gaming options continuing to increase around the world, Chinese nationals might even rather gamble in Vietnam, Cambodia, Singapore, or the Philippines, where they won't have quite the same level of scrutiny as they would in Macau."