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Course Contents. Economic History and Macroeconomic Environments Economic Structure Human Resource and Employment The Monetary System and Central Banking Public Finance and Economic Policy International Trade and Investment Tourism and Gambling The Manufacturing Sector

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course contents
Course Contents
  • Economic History and Macroeconomic Environments
  • Economic Structure
  • Human Resource and Employment
  • The Monetary System and Central Banking
  • Public Finance and Economic Policy
  • International Trade and Investment
  • Tourism and Gambling
  • The Manufacturing Sector
  • The Financial Sector
  • The Construction and Real Estate Sector
1 economic history and macroeconomic environments
1. Economic History and Macroeconomic Environments
  • What kind of an economy is Macau?
  • How does Macau get to the current point of economic development?
1 1 the macau economy
1.1 The Macau Economy
  • A “mini” economy located at the west coast of the Pearl River.
  • Definition of mini economies: (i) population<1 million, (ii) independent economic institutions, (iii) international recognition as an independent economic unit.
optimal development strategy
Optimal Development Strategy
  • Outward looking (Reliance on external resources).
  • Export-oriented (Reliance on external markets).
  • Specialization (Leading industry).
the family of mini economies
The Family of Mini Economies
  • Over 200 economies.
  • 56 potential “minis” locating in Asia Pacific, Europe, Africa and Latin America.
  • Accounting for less than 1% of world population and world area.
  • Small is beautiful: High or medium income the majority, the wealthiest in the world (Luxembourg), 5 (2) among top-ten wealthy economies in terms of GNI (PPP) per capita.
how about macau
How about Macau?
  • Lack of natural resources.
  • Sea, advantageous geographical location, human resources.
  • Latest population = 445 thousands (with the highest population density in the world), of which about 215 thousands economically active.
  • GDP about 20% of Beijing’s, 4% of HK’s.
  • High-income defined by World Bank since 1994.
  • GDP per capita=US$15,432 in 2002 (4th in Asia; 42nd in the world).
laissez faire example
Laissez-faire Example
  • Low, simple and “relaxed” tax system.
  • Absence of meaningful capital control.
  • Minimum government intervention in economic activity (except casino).
  • Pessimism Vs positive non-interventionism.
  • Modification since the 1980s: increasing public sector’s share of real GDP (about 13% in 2002).
outward looking and domestic policy
Outward Looking and Domestic Policy
  • Visible trade relies on the US, western Europe and China.
  • Invisible trade relies on China, Hong Kong and Taiwan.
  • Inward direct investment relies on Hong Kong (71%), China (11%) and Portugal (10%).
  • Pataca linked to HKD.
  • ΔG has little multiplier effect.
1 2 the past
1.2 The Past
  • An economic history of 450 years.
  • Portuguese arrived at the fishing village with a population of 400 in the 16th century (1557).
  • Paid an annual “ground rent” to the Ming government.
  • China recognised Portugal’s sovereignty over Macau in the 19th century (1887).
  • Portugal recognised Macau’s status as a Chinese territory under Portuguese administration (until 20 December 1999).
before the opium war 1840
Before the Opium War (1840)
  • Portuguese-promoted trade centre with a population of 13,000 (1839).
  • First entrance to China’s market for western merchants.
  • Position strengthened in the 18th century due to the closed door policy by the Qing government.
  • Trade links: China-Macau-India-Portugal, China-Macau-Japan, China-Macau-Philippine Islands- Mexico.
  • Goods traded: silk, silver, gold, opium.
after the 19th century
After the 19th Century
  • Status as a major trade and commercial centre in China lost to Hong Kong.
  • In 1850, only 2% of foreign traders in China resided in Macau.
  • Failed to establish economic foundation for future, sustainable development.
what s wrong
What’s Wrong?
  • Increase in competition from other Chinese coastal cities after the Opium War.
  • Lack of direct transportation links with the outside world.
  • The decline of Portugal, the rise of Britain in Asia.
  • Lack of effective capital accumulation.
  • Over-reliance on China trade and commerce.
what s left
What’s Left?
  • Trade restricted to Canton and HK areas.
  • Refocused on fishing (fishermen=over 70% of Macau’s population in the 1920s).
  • Introduced a licensing system for fantan.
  • Opium smuggling and “pig shops” or coolie trade.
  • Traditional industries such as matches, fire works, shipbuilding, incense.
  • Temporary boom during WWII.
after wwii
After WWII
  • Massive outflows of population and capital.
  • Population dropped from the all-time high of 600,000 to 187,000 in 1950.
  • UN embargo due to the Korean War.
1950 s and 1960s
1950s and 1960s
  • Modern industries in particular textiles developed due to Portugal’s duty-free privileges.
  • S.T.D.M. replaced Tai Hing Co. of the Fu family.
  • Western-style games, fleet of jetfoils, millions of gamblers from HK, huge tax contribution and re-investment requirements.
take off 1970s and 1980s
Take-off: 1970s and 1980s
  • Hong Kong industrialists established “out-processing facilities” (low-cost operating environments and industrialized countries’ preferential treatments).
  • Exports diversified from Portugal-related markets to North American and western European markets.
  • Number of manufacturing establishments: 172 (1961), 870 (1978), 2,300 plus 1,000+ unregistered “family factories” (mid-1980s).
manufacturing driven growth
Manufacturing-driven Growth
  • Manufacturing accounted for 40% of Macau’s GDP in the golden period (mid-1980s).
  • Textile and garments dominated (90% of total visible exports in late-1970s).
  • 1971-81: average annual growth = 16.7% > 10.4% in Hong Kong. 1983-1990: average annual growth=7.6%.
  • Manufacturing-led demand for services: Modern banking law (Decree Law No. 35/82/M); No. of banks: 10 (1970s), 21 (end-1980s).
1990 s
1990s
  • Consistent contraction in manufacturing and correspondingly, significant slowdown in visible exports growth.
  • Increasing reliance on gambling (plus hotels, restaurants and retail commerce).
  • The rise of some other tertiary production such as banking and insurance.
  • Construction and real estate saw ups and downs.
what s wrong with manufacturing
What’s Wrong with Manufacturing?
  • Relocation to southern China.
  • Reduction in preferential treatments and protectionism spreading to Macau.
  • Failure to upgrade competitiveness by quality and technological advancement (SMEs? HK-based large factories?)
2 economic structure
2. Economic Structure
  • Structural importance measured by share of GDP, share of employment and share of exports.
  • In 2001: Secondary=13.6% of GDP, Tertiary=86.4%.
primary production
Primary Production
  • Fishing, farming
  • Stimulating impact on some secondary and tertiary industries such as seafood manufacturing and trading, ice factory and storage.
  • Reasons for its decline: harbour pollution, reclamation projects, short supply of labourforce, keen competition from China.
  • Employment: about 300 (0.1).
  • Domestic seafood meets 5% of domestic demand.
secondary production manufacturing
Secondary Production: Manufacturing
  • The largest component of secondary production.
  • Over 95% outputs exported.
  • GDP share dropped rapidly from 20.3% in 1989 to 8.5% in 2001. Employment share dropped from 33% (early 1990s) to about 20% (about 40% are imported workers).
  • Exports in goods=35% of total exports in real terms (2002).
  • Lowest value added among all major economic sectors (22.7% in 2001).
construction
Construction
  • A contracting industry in the 2nd half of 1990s due to excess supply, completion of major public projects, withdrawal of speculative funds, significant reduction in immigrants.
  • Contribution to GDP: from 4.7% (1989) to 2.0% (2001). Employment share: 7.5% (2002).
  • Part of exports in non-industrial services if foreigner purchases.
electricity gas and water
Electricity, Gas and Water
  • Import-oriented, with major valued added by Macau Electricity Co. (CEM).
  • GDP share: stabilised at 2-3% in the past decade.
  • Employment share: 0.6% of total employed workers.
tertiary production
Tertiary Production
  • Gambling dominated.
  • Included in “Public Administration, Other Community, Social and Personal Services” and accounted for about 32% of Macau’s GDP (2001).
  • Gambling tax contributes to about 70% of government revenues which finance “public administration (9.4%) and education (3.4%).
  • Tertiary production with higher value added (over 60% of gross output) and larger operating surplus (about 67% of value added).
slide27
Over 10 million visitors/year generate production in “Wholesale, retail, restaurants & hotels” (about 12% of GDP) and “Transport, Storage and Communications” (about 7% of GDP).
  • Fair estimate: Gambling and tourist industry contributes to over half of the GDP.
  • Employing over 70% of workforce.
  • Exports in gambling & tourist services about 60% of total exports.
highly concentrated structure
Highly Concentrated Structure
  • Tertiary production over 80% of GDP, over half of exports, over 70% of employed population.
  • Likely to increase further at the expense of manufacturing.
  • Tertiary depends on gambling and tourism.
  • Services exports depend on gambling and tourism (over 90%).
low professional requirement
Low Professional Requirement
  • Technology- or knowledge-based tertiary production in developed countries, but not in Macau.
  • Over 35% workforce has primary education or below, only 10% has university education or above.
  • Possible reasons: dominance of gambling (a fairly ordinary, low-technology industry) and public services (non-market-driven sector).
rapid structural change
Rapid Structural Change
  • Secondary production accounted for 27.5% of GDP in 1989, but only 13.6% in 2001 - a loss of 14 percentage points in 12 years.
  • +ve: high flexibility (arguably strength of mini economies).
  • -ve: lacking of solid foundation, long-term investment commitment and specialised skills.
corresponding shift in export structure
Corresponding Shift in Export Structure
  • Services started to exceed goods in 1991.
  • Exports in industrial services recorded little growth in real terms in the 1990s.
  • Exports in tourist services grew relatively strong particularly in the area of non-gambling expenditure by non-residents.
  • Exports in non-industrial services with low base but grew by over 1,000% in last decade!
threat of structural unemployment
Threat of Structural Unemployment
  • Productivity of manufacturing workers lower than that of workers in tertiary industries.
  • Upgrade of labourforce keeps pace with the structural change?
  • If not, unemployment increases as manufacturing contracts (with imported workers as a cushion).
  • Hindrance of economic growth (in tertiary sector).
3 1 macau s population
3.1 Macau’s Population

Cultural Revolution

Return to Mainland after 1949

Inflows of Chinese immigrants

WWII

population development
Population Development
  • Increased from about 340 thousand in the early 1990’s to about 450 thousand currently, with about 96% Chinese (born in Macau and Mainland China), and less than 2% Macaense.
  • Natural factor only accounts for less than half of the increase; net migrants remain the major contributor to population growth.
  • Population inflows: legal immigrants and imported workers mainly from Mainland China, foreigners permitted to reside in Macau mainly from Hong Kong.
highest population mobility
Highest Population Mobility
  • Highest portion of foreign-born population: 56% (Hong Kong, 40%; Region of Gulf Cooperation Council, 35%).
  • Census 2001: 47% Macau residents from Mainland China (Hong Kong, only 35%).
  • New immigrants: 15% residents have stayed in Macau for less than 10 years.
  • Economic and social impacts.
population quality
Population Quality
  • Dependency ratio=38.3% in 2002, which has been slightly reduced in recent years.
  • Ageing index on an increasing trend (from 27.2% in 1993 to 38.4% in 2002) → higher dependency ratio in the future and reduced number/growth of economically active population.
  • Less-educated population has consistently reduced from close to 90% in the early 1990s to below 80% in recent years.
population projection 2001 2026
Population Projection (2001-2026)
  • From less than 450 thousand to 578 thousand in 2026 at an average growth of about 1%.
  • Increasing proportion of female pop. (from 100:92 to 100:88)
  • Aging population (from less than 10% to 20%)
  • Median age of residents from 34 to 40.
  • Life expectancy reaching 80 for men and 85 for women (increase of about 3 years)
3 2 labour
3.2 Labour
  • Labourforce determined by population and labour participation rate.
  • Labourforce = 45-50% of the population in the last decade.
  • Labourforce: about 214 thousands with labour participation rate reduced from the high of 66% in the middle of the 1990s to slightly higher than 60% in recent years.
  • Employed population: about 200 thousands (11% self-employed or family-employed).
labour quality
Labour Quality
  • Defined by productivity.
  • Education attainment.
  • Age.
  • Health.
  • Skill.
  • Flexibility.
  • Professional qualifications and continuous training.
3 3 employment
3.3 Employment
  • Employment, wage and productivity.
  • Underpaid? overpaid? (wage/output ratio comparison; wage index vs productivity index).
  • Productivity and wage highly correlated; productive workers well worth to be employed.
  • Wage “catch-up” for low-productivity sectors?
  • Labour Importation → ↑cost competitiveness?
monetary system in macau
Monetary System in Macau
  • The Silver Standard (Before 1906).
  • The Silver Standard and the Escudo Standard (1906-1941).
  • The “Pataca” Standard (WWII).
  • Gold Exchange Standard and the Escudo Standard (1946-1973).
  • The Escudo Standard (1973-1977).
  • The HKD Standard (1977-1983).
  • The HKD Standard and the USD Standard (1983-).
4 1 silver standard
4.1 Silver Standard
  • A monetary system similar to those in Mainland China, Hong Kong and other Asian countries.
  • Chinese silver ingots & coins, Mexican Eagle dollars, silver-backed pantans, Hong Kong’s silver-backed banknotes.
  • Supply of money determined by the amount of silver stock in Macau.
4 2 silver standard and escudo standard
4.2 Silver Standard and Escudo Standard
  • Patacas issued by BNU circulated in 1906.
  • Patacas with a guaranteed silver content, linked to the Escudo (under the Gold Standard) at a fixed rate of Ptc1:Esc5.
  • BNU required to keep monetary reserves ≧ 1/3note issues.
  • Exchanged for HKD in unofficial/open markets at the rate of 1:1 roughly.
  • Patacas poorly received and the fixed exchange rate between pataca & escudo only applied to a limited number of official transactions.
4 3 pataca standard
4.3 “Pataca” Standard
  • HKD and Chinese money lost value during wartime.
  • Link to escudo disturbed.
  • Concerns for Japanese military yen.
  • Patacas rose to a popular means of payment, with stern enforcement and substantial reserves (silver and acceptable foreign currencies).
4 4 gold exchange standard and escudo standard
4.4 Gold Exchange Standard and Escudo Standard
  • Bretton Woods System formally in place.
  • Macau adhered to the Escudo area with a fixed rate of Ptc1:Esc5.5.
  • Linked to all major currencies and HKD.
  • Stable exchange rate with HKD a real priority (devaluation in 1949 and 1967 with HKD).
4 5 escudo standard
4.5 Escudo Standard
  • Portugal notified the IMF to float the escudo.
  • Pataca devaluated against the HKD with the escudo.
  • Ptc:HKD exchange rate reached all-time low of 1.21 in 1976.
  • Serious inflation and disturbance to the daily business activity.
4 6 hkd standard
4.6 HKD Standard
  • Officially linked to the HKD at the rate of Ptc1.075:HKD1, with a fluctuation margin of ±1%.
  • End of 71 years’ official link to the escudo.
  • Pataca floated against major currencies with a floating HKD.
  • Realignment on several occasions in appreciating direction, and eventually settled at the current rate of Ptc1.03:HKD1.
  • BNU became the agent of IEM in 1980.
4 7 hkd standard and usd standard
4.7 HKD Standard and USD Standard
  • HKD linked to USD.
  • Pataca’s link to HKD maintained following the failure of revaluation attempts.
  • Introducing the Currency Board System (100% reserve requirement) in 1989 with the establishment of AMCM.
  • BNU regained its exclusive right to issue banknotes (agent of the government).
  • BOC became the second note-issuing bank.
4 8 currency board system
4.8 Currency Board System
  • Different from central-bank issuing system.
  • Exchange between Certificate of Indebtedness (CIs) and a reserve currency at a fixed rate; 100% back-up by international reserves;full convertibility.
  • Statutory obligation to issue and redeem the currency on demand against reserve money at a fixed rate of exchange and without limit.
  • Money supply not determined by the Currency Board, but BOP automatic adjustment rather than central-bank discretion.
macau s system
Macau’s System
  • Currency board (AMCM) does not issue legal tender notes.
  • Decree Law No. 7/95/M: foreign assets back-up (minimum “primary cover rate”=90%), CIs exchange, reserves managed by AMCM.
  • AMCM participates in the thin pataca exchange market to support the fixed rate.
  • At end-1999, foreign exchange reserves net of 1-year foreign currency liabilities (primary cover rate) = 105% of pataca liabilities.
4 9 currency substitution
4.9 Currency Substitution
  • A tendency for a domestic currency to be systematically replaced by one or more foreign currencies in discharging normal monetary functions.
  • Decree Law No. 16/95/M: requirement for pataca prices; freedom to make payments in patacas; settlements of debts and clearing of transactions by patacas accepted; credit card payments settled with patacas; payments and receipts of public organizations in patacas.
reasons
Reasons
  • Tradition: high acceptability of HKD for more than one hundred years.
  • Economic strength: a mini economy without a central bank and any guarantee of 100% international reserve back-up before the establishment of the currency board system in 1989.
  • Economic reliance: substantial imports from and business transactions (such as tourist spending) with Hong Kong.
  • Monetary status: domestic, rather than international currency (pataca exchange-rate quotations only exist in China, Portugal and HK).
  • Financial instruments: lack of pataca financial assets.
5 1 budget principles
5.1 Budget Principles
  • Fiscal autonomy and independent finance (Organization Statutes of Macau/Basic Law).
  • Consolidated budget (government departments plus autonomous bodies).
  • Balanced budget.
  • Expenditure growth in line with GDP growth.
  • Procedures: depts. +respective policy secretaries → Director of Finance Services Bureau (Jul.) → Chief Executive + policy secretaries (Sept.) → Executive Assembly (Oct.) → Legislative Assembly (Nov.)
5 2 revenue
5.2 Revenue
  • Current revenue: direct taxes, indirect taxes, franchise revenues, property incomes, fees, fines & other penalties.
  • Franchise revenues (or revenue from concessionaires) most important - increasing reliance on the gambling industry.
  • Stamp duty increases as it replaces property transfer tax (SISA).
  • Property income (mainly incl. land premium and “dividends” from the AMCM and SAR Reserve Fund) declining due to the major correction in the real estate market in previous years.
  • Profit tax the largest tax receipts.
slide57
Capital revenue: sales of investment goods, capital transfers.
  • Autonomous bodies receipts listed in the consolidated account - including substantial transfers from current expenditure to support their expenditures and maintain a nominal “balance” (i.e. Specific Accounts).
  • Overall a low tax system with heavy reliance on gambling revenues.
5 3 expenditure
5.3 Expenditure
  • Current expenditure: government dept. spending (mainly personnel) and transfers to autonomous bodies and funds.
  • Capital expenditure (mainly on infrastructure investment plans) – increasing in recent years.
  • Major items: security, economic services, health and education.
  • Autonomous bodies expenditure - balanced by an equal amount of revenue.
slide59
Notable trend: fast growth of expenditure.
  • Expenditure growth ~ revenue growth > GDP growth.
  • Rising expenditure-nominal GDP ratio; stronger government participation in the domestic economy;weakening in laissez-faire policy.
  • Strong revenue growth and budget balanced.
5 4 primary overall balance
5.4 Primary/Overall Balance
  • Overall balance in surplus except in 1991.
  • Primary balance in surplus except in 1991, 1995, 1998 and 1999.
  • Record deficit in 1998 (MOP1.5 billion) - a significant drop in gambling revenues.
  • Negligible public debts (loan guarantee for SMEs and monetary bills).
  • Accumulated surplus (about MOP7 billion) and SAR Reserve Fund (about MOP10 billion).
6 1 the trend of trade
6.1 The Trend of Trade
  • Strong reliance on trade
    • a mini economy
    • free trade policy
    • no forex control
  • Decline in the degree of openness from close to 200% in the early 1980s to about 162% in 2002.
  • Sluggish growth in exports in goods, but strong growth in exports in services.
  • Exports in services > exports in goods since 1991.
unsatisfactory export performance
Unsatisfactory Export Performance
  • Small significance, low value
    • 0.1% of Asian exports (goods)!
    • equivalent to about 1.2% of Hong Kong’s exports and 0.7% of China’s exports in 2002 according to WTO
  • Reasons for slowdown
    • relocation to Mainland China
    • loss of competitiveness (high per unit cost)
  • Consistent with the best development strategy for a mini economy?
    • merchandise exports no longer an engine of growth
    • how about services?
    • cross-border industrial zone
6 2 trade structure
6.2 Trade Structure
  • Geographical (export market and import source) and export product concentration.
  • Increasingly relying on the US market in particular (close to half), due to MFA quota system.
  • EU (mainly Germany, the UK and France) as a whole accounting for about one-fourth.
  • Hong Kong one of the top-5 export markets and import sources, but its importance declining due to the establishment of Ka Ho Harbour in Coloane in 1991.
  • China risen to the 1st import source (over 40% share) due to Macau’s expansion of outprocessing facilities in South China.
slide64
Taiwan rising as a major import source
    • increased investment in Zhuhai and Zhongshan
    • establishment of Ka Ho Container Terminal and Taipa airport
    • Taiwan’s industrial machinery and raw materials increasingly competitive
  • Over 80% of the exports are textiles and garment (garment items only around 70%).
  • Services export concentrated on tourism (over 90%) and tourists mainly from China, HK and Taiwan (over 90%).
6 3 foreign investment
6.3 Foreign Investment
  • First set of official BOP released at end-2003, and FDI & CPIS released since 2002.
  • Stock of inward (outward) direct investment=MOP27,231 million (MOP3,737 million).
  • On inward FDI, Hong Kong (71.0%), China (11.2%), Portugal (9.7%), the UK (3%) and the US (1.4%).
  • On outward FDI, Hong Kong (41.2%) China (28.5%), Portugal (15.7%) and Canada (8.1%).
  • Stock of outward portfolio investment (international reserve excluded)=MOP32,722 million.
  • Mainly in HK (28.8%), the US (10.4%), Australia (10.2%), Germany (6.3%), Cayman Islands (6.1%) and the UK (6.1%).
  • Debt securities accounted for about 70%.
a capital exporter
A Capital Exporter
  • Consistent and large current account surplus.
  • Consistent and large capital & financial account deficit.
  • Consistent BOP surplus (accumulation of international reserves).
  • Macau does not provide enough investment opportunities not only for outside investors but also for local investors.
  • Development of capital market?
incentives to foreign investors
Incentives to Foreign Investors
  • Inward investment of USD125,000 granted the right of abode (only USD62,500 for Hong Kong retirees).
  • Investments “promoting diversified and modern economic activities” entitled to 4-6% interest rebate/subsidy on MOP bank loans for 1-4 years.
  • Bilateral agreements with Portugal (1999) and China (2003) on avoidance of double taxation and investment protection.
  • Tax incentives for all for selected businesses (e.g. public housing, tourism, aviation, offshore).
  • Free facilities of Business Support Centre
7 1 trend of tourism
7.1 Trend of Tourism
  • Most important economic sector
    • GDP share
    • export share
    • contribution to government revenue
    • employment
    • linkage effect on other sectors
  • Recent trend
    • significant drop in visitors from most areas in 1999, but a strong rebound thereafter
    • largest loss in Japanese visitors (4th largest) in the past few years
    • strong gain for Mainland China (1st largest) in the past few years
major sources of visitors
Major Sources of Visitors
  • China, Hong Kong, Taiwan account for over 90% of the total.
  • China
    • close to half of the total
    • exceptionally strong growth despite SARS
  • Hong Kong
    • the largest source for many years
    • a notable rebound after Macau’s reversion to Chinese sovereignty
  • Taiwan
    • fast growth after the establishment of the international airport
    • share of Macau-Taiwan flights about 60%
    • share of visitor arrivals by air over 80%
other tourism related indicators
Other Tourism-Related Indicators
  • Hotel sector
    • low occupancy ratio (about 64% on average in 2003) and excess supply of hotel rooms during weekdays
    • best performance for 3-star hotels (about 74%)
    • “excursionists” dominated (40-50%)
    • European/American visitors stay longer
    • length of stay normally less than 2 nights
  • Per capita spending
    • less than 2 thousand patacas on average
    • visitors from China and Southeast Asia spend more, HK visitors spend less
    • shopping, food & beverage, accommodation the largest items
  • Overseas travel of Macau residents by package tour (local tourist business)
    • about 200 thousand per year
    • most of them go to China (over 70%); Thailand, Taiwan, S. Korea and Japan also popular
7 2 the status
7.2 The Status
  • Most important economic sector in Macau.
  • Receiving visitors every year more than 25 times its population.
  • Visitors spent equivalent to about 64% of Macau’s GDP in real terms.
  • Ranked 8th (6th) in the world in terms of international transport-adjusted tourism receipts (tourist arrivals) in the East Asia & Pacific Region in 2002, according to WTO.
reasons for strong growth
Reasons for Strong Growth
  • Attraction of casinos.
  • Easy entry policy.
  • Improvement of hotel, transportation and entertainment facilities since the 1980s.
  • Advantageous location close to Hong Kong at the Pearl River Delta.
  • Strong income growth in the Greater China region.
  • Cultural and environmental attraction to western tourists for vacation since the 18th century.
  • Strengthening in overseas promotion and organizing international events since the 1980s.
  • Central government supporting policy.
7 3 development of gambling business
7.3 Development of Gambling Business
  • A sub-sector of tourism as most gaming receipts of Macau’s casinos are from non-residents (estimated 88%).
  • Gambling expenditure accounts for about 60% of tourist spending and over 30% of GDP.
  • Started after the Opium War
    • over 200 fantan houses in the 1860s
    • gambling tax generated more than 10,000 dollars of fiscal transfer to the Lisbon government
    • relating to the coolie (“pig”) trade
    • HK prohibited gambling in 1872
    • nicknamed “Monte Carlo in the Oriental”
  • In the early 1930s, gaming monopolised by Ho Hing Co. (Lo, Fan & Fok families).
  • In 1937, exclusive right granted to Hai Hing Co. of Fu and Ko families, which opened 3 casinos.
  • In 1961, formally legalised the gambling business in Macau.
the s t d m s j m
The S.T.D.M./S.J.M.
  • In 1962, S.T.D.M. won the exclusive right in an open tender
    • S.T.D.M.’s 3,160,000 bid just marginally higher than Tai Hing’s 3,080,000 bid
    • founders included Fok, Ho and Yip
    • in 1982, Yip sold his shares to the Cheng family of New World in HK
    • contract revised and extended in 1982 and 1997
    • Current shareholding structure: H. Fok, 27.7%; S. Ho, 26.3%; H. Cheng, 13.94%; Y.K. Ho, 7.3%; STDM, 10.8%; Shun Tak, 5% and others, 8.96%.
  • Tax and re-investment/social obligations.
  • Annual gross receipts increased rapidly from about MOP600 million in late-1970s to MOP17.8 billion in 1997, and to MOP27.8 billion in 2003.
  • Directly employing over 12,000 people.
  • Other activities include horse racing, sport betting, greyhound racing, lottery which only accounts for less than 6% of the income.
liberalization 1
Liberalization 1
  • A special committee has been formed for the study of the future development and management under Executive Order No. 120/2000 of 29 June.
  • Members of the Committee: Chief Executive (chair), Secretary for Economy and Finance, Representative from Secretary for Social Affairs and Culture, Representative from Secretary for Security and Director of Gambling Inspection and Coordination Services.
  • Arthur Anderson Consulting in a 3-phase report
    • outside experience in the US, the UK and Australia (finished at end-2000)
    • current situation in Macau, comparing with outside experience (ended at Feb., 2001)
    • future gambling policies (ended at mid-2001)
liberalization 2
Liberalization 2
  • Law No. 16/2001 on Casino Operation (August) and determination of concession number.
  • 7-person Gaming Project Team (Sep. 2001) and Expressions of Interest (22).
  • Administrative Regulation No. 26/2001 and 8-person Tender Commission (Oct. 2001).
  • 21 tenders (2/11/01-7/12/01) and 18 companies for consultation (Jan. 2002).
  • Criteria of assessment: committed premium, contributions to foundations and social construction, experience, economic benefit created by committed investment, upgrading the value of the location of casinos and staff training.
  • Wynn Resorts, Galaxy and SJM (8/2/2002).
7 5 potential threats
7.5 Potential Threats
  • Very sensitive to external shocks (e.g. SARS) and concentrated source of visitors.
  • Public security.
  • Direct link between Taiwan and Mainland.
  • HKSAR relaxation of entry regulation for Taiwanese.
  • Loss of attraction of casinos
    • 20.2% of visitors with their purpose of visit for gambling in 1990 but less than 3% currently according to the Visitor Expenditure Survey
    • increased competition in the region
    • service quality
  • Realisation of the MOP17 billion investment by new operators and challenges of change in regulatory regime.
8 1 phases of industrial development
8.1 Phases of Industrial Development
  • Earliest stage (17th Century)
    • copper guns, junk building
  • 19th Century (post-Opium War)
    • matches, firework or firecrackers, incense, ship building
  • 1st half of 20th Century
    • infant stage of textile industry
    • low level of machinery application
    • small establishment or family-based
    • products including towels, low-quality clothes
  • The 1950s
    • some small establishments producing plastic or cloth shoes, Chinese furniture, China articles and metals
    • exports mainly to Portuguese dependent territories
industrial up
Industrial Up
  • The 1960s
    • formal textile factories established
    • started expanding into European and US markets
    • number of establishments over 300 with about 20,000 workers
    • traditional industries declined
  • The 1970s
    • industrial take-off with the rise of textiles and garments
    • new industries including plastics, electronics, toys, artificial flowers, construction materials and food processing
industrial down
Industrial Down
  • The 1980s
    • temporary rise of toys, electronics and artificial flowers
    • further development and dominance of textiles and garments towards the end of the 1980s
    • number of establishments over 2,000 with about 70,000 workers
    • the largest economic sector in Macau
    • government promotion of industrial development
  • The 1990s
    • a major and consistent slowdown
    • further concentration on textiles & garments and a few markets
8 2 characteristics
8.2 Characteristics
  • Export oriented
    • export/sales ratio normally around 90% for manufacturing
    • mainly to the US/Europe
  • Light industry concentrated on textiles and garments which account for about 80% of manufacturing value added.
  • Small establishments, small scale
    • only 6 manufacturing establishments employed over 500 workers
    • about 90% employed less than 100; about 70% employed less than 20
    • sub-contracting model
slide82
Labour intensive and low value added in manufacturing
    • SMEs the majority
    • fixed capital stock [machinery & equipment] in 2002 amounted to about MOP2.0 billion [MOP624 million] – declining
    • capital employed per worker = MOP48 thousand [MOP15 thousand] – declining
    • 64% (labour compensation/value-added); 23% (value added/output) – declining
  • Reliance on quota protection and GSP
    • quota distributed by DES under Decree Law No. 50/80/M
    • basic quota and free quota
    • quota transferable
  • Reliance on Hong Kong
    • capital, management, technical supports, sources of orders and inputs
  • Reliance on China
    • low-cost labour (immigrants, imported labour and outprocessing)
8 3 problems
8.3 Problems
  • Loss of traditional competitive edge
    • cost
    • quota protection and GSP
  • Difficulties for upgrading productivity and product
    • lack of skills and human resource to develop Macau’s own products under “cross-border sub-contracting”
    • lack of capital and technical endowments under SME-dominated industrial structure
    • lack of incentive to invest long term with the heavy reliance on sub-contracting orders
    • lack of local-based large enterprises and entrepreneurship
8 4 the survival discussion
8.4 The Survival Discussion

+ Strong linkage with other economic sectors such as trading, finance, construction, energy and transportation.

+ Relieving employment burden.

+ Government supports helpful (Trans-border industrial zone).

+ Strengthening in cooperation with China (CPEA).

- Not possible to achieve the necessary upgrade under the current industrial and production structure (SMEs)

- Unwillingness of banks to extend loans and no capital market support.

  • Human resources not supportive to the upgrade (over 80% of manufacturing workers less educated; most redundant manufacturing workers middle-aged or elderly).
  • Reducing capital stock and negative market signal.
9 1 the banking development pre 1970s
9.1 The Banking Development: Pre-1970s
  • Only one bank - BNU.
  • Large number of native Chinese financial institutions (An Ho) which were tightly held family businesses.
  • Most An Ho started business as money changers, bullion dealers, moneylenders and remittance houses.
  • The number of An Ho and moneychangers increased to over 300 during WWII, but dropped to below 20 after the war.
the gold trading
The Gold Trading
  • A very profitable business for large An Ho.
  • High restriction in Hong Kong promoted gold trading in Macau.
  • Exclusive right granted to Wong An Co. which was allied with some An Ho.
  • Government imposed import tax which contributed over 10% of fiscal revenue.
  • Gold imported from Europe and re-exported to Hong Kong and South-east Asian countries.
  • Some An Ho (such as Ho Yin’s Tai Fung) established a strong capital base due to the high trading profit.
  • The business declined as Hong Kong liberalized gold trading in 1973.
  • Exclusive system ended.
the beginning of modern banking 1970
The Beginning of Modern Banking 1970
  • The first Banking Ordinance (Portugal’s Decree Law No. 411/70)
    • bank supervisory authority granted to the Governor, with the assistance of note-issuing bank
    • minimum capital requirements
  • Many existing An Ho failed to meet the capital requirement → regulator limited their business scope.
  • A few well-capitalized An Ho developed into commercial banks
    • still existing including Tai Fung, Weng Hang, Seng Heng, Luso International (formerly Key Che An Ho), Delta Asia (formerly Hang Seng)
  • 1st inflow of foreign banks from HK: HSBC, OTB, the Bank of Canton (now Bank of America).
  • China-controlled Nam Tong Bank (now BOC) established.
  • In early-1980s, 15 banks in Macau and most were local banks.
the new banking ordinance 1982
The New Banking Ordinance 1982
  • Rapid growth in the 1970s and 1980s → banking development lagged behind economic development.
  • IEM established in 1980, responsible for supervision of financial institutions.
  • Decree Law No. 35/82/M
    • backbone of banking regulations in Macau
    • a foundation of modern banking regulatory framework incl. provision of reserves against risks, legal authority to examine banks’ operations and to deal with crises
    • capital requirement raised to MOP30 million (increased to MOP100 million in 1993 when Decree Law No. 35/82/M replaced with Decree Law No. 32/93/M, so called the Financial System Act)
    • stimulating the 2nd inflow of foreign banks (no. of foreign banks increased from 5 in 1982 to 13 in 1983)
recent business environments
Recent Business Environments
  • Foreign participation promoted banking development
    • 1986-1989, banks’ asset size more than doubled
    • average annual growth > 20%
    • offshore banking
  • Growth moderated somewhat in the 1990s.
  • Ratio of bank assets to GDP at 258% in 2002 (from 230 in mid-1980s) →a high level of banking development.
  • 23 banks (excl. one postal saving bank).
  • Reduction in local operations in the past few years
    • Branch offices from 138 in 1997 to 109 in 2002
    • Staff from 3,943 in 1997 to 3,557
  • Relatively good profit business (operating result before tax at MOP907 million in 2002), and hence a major contributor to profit tax of about 500 million
9 2 domestic banking resident deposits
9.2 Domestic Banking – Resident Deposits
  • Resident deposits increased from about MOP8 billion in 1984 to MOP108.7 billion at end-2003
    • a growth rate much faster than the GDP growth rate
  • Demand deposits, savings deposits, notice deposits and time deposits
    • portion of time deposits larger than 60%
    • about 80% time deposits are short term (less than 3 months)
    • HKD deposits over half
  • Concentrated deposit structure
    • BOC, Tai Fung and Seng Heng over 60%
domestic credit
Domestic Credit
  • Increased from about MOP6 billion in 1984 to MOP52 billion at end-2003, but contracting in recent years, especially on loans to private sector.
  • Including loans, financial investments and claims on monetary institutions.
  • Over 65% extended to non-bank private sector.
  • The rest mainly the holding of monetary bills and interbank lending.
  • High concentration (BOC, Tai Fung, Weng Hang accounting for over half of private-sector credit).
special features and their implications
Special Features and their Implications
  • Relatively small local interbank market.
  • Negligible bank credits to the government.
  • Largest economic sector in Macau little requirement for bank loans.
  • Concentrated on property-related credits.
  • Implications
    • limited growth potential for domestic business with exceptionally low loan-to-deposit ratio
    • banks unwilling to extend credits to domestic SMEs
    • banks tend to extend loans to better-capitalised construction firms, property developers and public projects
    • home mortgage believed to be of low risk (100% collateral if market risk ignored)
9 3 offshore banking
9.3 Offshore Banking
  • A major banking business in Macau.
  • All 24 banks engaged in the business (banking is an international business).
  • Offshore Banking Ordinance (Decree Law No. 25/87/M) enacted in 1987, but very active offshore business before the legislation (40% of the banking turnover in late-1980s).
  • Foreign asset share in total assets expanding in recent years to over 60%; foreign liability share in total liabilities abot 14%.
  • Domination of low value-added, cross-border interbank transactions
    • 65% of foreign assets = interbank lending in 2003
    • 23% of foreign liabilities = interbank borrowing in 2003
    • inactive offshore syndicated loan
reasons for the strong growth
Reasons for the Strong Growth
  • A liberal and integrated banking system.
  • Low tax system.
  • Dominant foreign currency portion in resident deposits.
  • Close financial relations with Hong Kong, Portugal and China.
  • Limited business opportunity in domestic market.
the basic problem
The Basic Problem
  • Active offshore business + high integration of onshore and offshore banking sectors.
  • Foreign assets always > foreign liabilities.
  • Continued existence of “excessive” domestic funds supports the expansion of foreign lending.
  • Implications
    • Macau’s banking sector a net creditor to the rest of the world (capital exporter)
    • domestic funds under-utilized (no opportunities or unwillingness to extend loans to domestic business and individuals?)
    • banking sector’s role in promoting domestic economic growth undermined
9 4 questions of future developments
9.4 Questions of Future Developments
  • How to strengthen the role of banks in promoting Macau’s economic growth?
  • How to upgrade the professional level and encourage financial innovation?
  • How to further develop Macau’s offshore banking business?
  • Should Macau develop its financial markets? How?
  • How to maintain the banking stability?
10 1 the property development
10.1 The Property Development
  • Concentrated on residential units, commercial & offices.
  • Very few supplies of industrial properties in the past few years.
  • Before the 1960s
    • no unit sales
    • no property installment loans
    • most residents staying in some 2-storey houses built in the 1800s
  • Developed started with the inflow of overseas Chinese immigrants in the 1960s
    • 4-storey, multi-apartment residential buildings
    • practice of per-apartment/floor sales
  • Many ups and downs in the past four decades of development.
factors contributing to the ups and downs
Factors Contributing to the Ups and Downs
  • Economic growth.
  • Immigration and population.
  • Positive link to Hong Kong’s market.
  • Government policies.
  • Interest rates.
  • Political factors.
  • External (speculative) funds and economic environment/policy in China.
10 2 land for property development
10.2 Land for Property Development
  • Government or state land
    • land leased with a time limit
    • land leased without a time limit
  • Developed buildings on the land belonged to the developers, but the land ownership of the land belonged to the government
    • land concession premium
    • annual land tax
  • Develop the land according to the land leasing contract.
  • Property owners pay annual urban house tax.
  • Ways to grant leased land
    • public tender
    • secret tender
    • private negotiation and assignment
  • Land supply.
land concession premium
Land Concession Premium
  • Portaria Law No. 230/93/M.
  • Calculated by Director of Land, Public Works & Transport Bureau, based on the estimated profit from land development.
  • 20%-40% of estimated profit as land premium.
  • Not necessarily paid in cash.
  • Installments allowed.
private land
Private Land
  • Both the land and the buildings on the land belonged to the private individuals.
  • Complete freedom to develop the land.
  • Private land in Taipa and Coloane may not have legally recognised land contracts
    • occupied the land for many hundred years
    • some legalized by application of “land granting” before 1991, with payment of land premium
    • some with Sa Chi contracts only and legal ownership unsettled
10 3 market conditions ve
10.3 Market Conditions (+ve)
  • Downturn lasted for 8 years and signs of recovery since 2003.
  • Little rebound in prices on average (+2% in 2003) but significant rebound in prime areas (Conselheiro Ferreira de Almeida, ZAPE, NAPE, Ocean Gardens, centre of Taipa) and land sale (one case only).
  • Sharp rise in new residential construction (in terms of floor areas and no. of units).
  • Nominal salary of local construction workers a consistent rebound in the past few years.
  • No. of newly registered co. increased significantly in the past few years.
  • Impact of gaming-sector liberalisation?
10 3 market conditions ve103
10.3 Market Conditions (-ve)
  • Transactions actually dropped significantly in 2003 (partly due to the termination of the 4% interest subsidization scheme in the first half of 2002).
  • Continued delay of the payment of land concession premium.
  • High vacant units (24,000 residential; 10,000 commercial and offices).
  • Over 70% of Macao residents living in their own properties.
  • Backward regulations on pre-sale, leasing, deed (e.g. on carpark) and construction, and high transaction costs.
  • Competition from neighbouring cities.
10 4 proposed stimulating measures
10.4 Proposed Stimulating Measures
  • Promote a faster growth of population by means of increasing immigrants from China and Hong Kong.
  • Improve infrastructure and living environment in old areas by the government; better city planning.
  • Reduce the stamp duty of property transactions (currently at 3%) and 1.5% deed registration fee, and remove the difference of housing tax between self-occupied and leased properties.
  • Limit new land supply.
  • Promote overseas.
  • Rationalise administrative rules on property transactions (e.g. on pre-sale regulation; licensing of property agents), leasing (e.g. court for leasing disputes) and management.
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