Eye on China: Capitalism to the rescue in Macao

I was in Macao last weekend and the transformation this former Portuguese colony close to Hong Kong has undergone is amazing. In fact, it's one of the most promising signs I have seen that Beijing's sclerotic hand doesn't infect everything it touches.

I last visited Macao about five years ago and it was grim. Just a short ferry ride from Hong Kong, you came on to a crumbling city landscape mixing poorly-maintained colonial buildings and a 1970s-style concrete jungle. The people looked conspicuously poorer than the Hong Kongers, and went about their business in drab clothes and without any discernible dynamism. The female population seemed to be composed mainly of prostitutes, who worked in seedy hotels close to the equally seedy casinos.

The casinos were awful: ugly and full of desperate people. One man had had a monopoly on gaming in Macao since 1961: Stanley Ho. Ho's first licence, won through a competitive bidding process, gave him monopoly rights for 25 years. In 1986, this was extended for another 15 years.

His powerful position brought little benefit to Macao. It was only when his grip was broken five years ago by the post-colonial government (Macao was handed back to China in 1999) that Macao's lift-off occurred.

US entrepreneurs from Las Vegas, notably Steve Wynn, began to take advantage of deregulation in Macao and started investing millions of dollars in the region.

New Las Vegas-style casinos are being built in peninsular Macao. Already the territory has become the biggest gaming centre in the world.

Fortunately, Macao's Government has used the extra tax income wisely, lavishing funds on Macao's cultural heritage. Historic buildings, museums and beaches have emerged resplendent from years of neglect and this, in turn, has attracted tourists who aren't just interested in gambling.

Mind you, the Macao miracle has its dark side. Given that China strictly controls the inflows and outflows of its currency, it's odd that the casinos are clearly making huge amounts from Chinese tourists. These mainlanders are somehow getting their hands on considerable amounts of foreign currency (since you are not permitted to bet in either the local Macao currency or the yuan).

In fact, Macao has been called one of the great laundering centres of Chinese money in the world. People smuggle yuan to Macao and switch it into a hard currency via the casinos. It's a system that has probably been used in the huge bank scams that have characterised China over the past few years, with bank officials siphoning millions of dollars from customer accounts and moving it offshore.

A sad conclusion to a wonderful capitalist success story? Perhaps, but I can't help thinking it's all worth it.

Over the water, Hong Kong is a classic example of how some strategic illegality can work wonders. A veteran banker told me about Hong Kong's crucial role when Britain imposed the protectionist sterling area on its former colonies after World War II.

Hong Kong's colonial administration was intensely hostile to this arrangement, which left the local currency hostage to Britain's severe devaluations in 1967 and 1972. They fought back by turning a blind eye when Hong Kong companies avoided the exchange controls imposed by London and thereby made Hong Kong a major (and illegal) offshore centre for currency dealing. Members of the Commonwealth could come to Hong Kong and switch their sterling for US dollars.

Mainland China was a key beneficiary, since it could buy sterling to finance crucial imports when internal political fanaticism disrupted local supply. Buying sterling was essential because the Americans had imposed a strict embargo on trading with China after the Korean War, making US dollars unavailable.

So Hong Kong's rise was based on illegality twice over: selling opium to China against the Chinese Government's wishes in the 19th century and avoiding British currency controls in the mid-20th century. As Macao is finding, breaking the rules can be extremely beneficial.

* Eye on China is a journalist based in Beijing.