China property tycoons bet that gambling will come to Hainan

In China’s southernmost province of Hainan, inside a glittering skyscraper shaped like a sail, Zeng Xianyun has been waiting for Xi Jinping, in more ways than one.

This week, the Chinese president will visit the island and hotel magnates like Zeng hope the leader will come bearing gifts: new tax concessions to attract more tourists to this tropical destination nestled along the South China Sea near the Vietnam border. Local entrepreneurs and global firms like MGM Resorts International have spent big on sea-side developments here.

Many of these investors are making a wager of their own: Someday in the future, Hainan could be teeming with Chinese gamblers, who will give an adrenaline shot to a tourism-dependent economy that hasn’t fully lived up to expectations. Right now, gaming remains banned across mainland China and the island only attracts a fraction of the country’s tourism outlay.

Xi will speak at the island’s Boao Forum and mark the 40th anniversary of China’s economic opening. While Hainan’s elite aren’t expecting him to immediately announce any wholesale legalization of gambling, they are hopeful the policies he unveils will help draw more tourists. And in doing so set off a policy roadmap that eventually ends with regulated casinos.

Any move to ramp up tourism in Hainan or open it up to gambling would reverberate within the global travel industry. Chinese jetsetters take about 130 million trips overseas each year, the government estimates, spending lavishly from Las Vegas to Bali and Paris.

Outside the mainland, in Macau, where casinos are permitted, the bulk of revenue still goes to foreign operators like Las Vegas Sands and MGM. A more nationalist angle on the question of gambling and tourism is now finding its moment, dovetailing with Xi’s emphasis on a resurgent China taking its place on the world stage.

The question, according to Zeng, is not why the house always wins, but why that house should be foreign. He hopes China can legalize the gaming industry and make Hainan the first mainland province with casinos to reduce the capital outflows.

“We need to take the issue seriously instead of avoiding it,” said Zeng, who is chairman of Phoenix Island, an artificial archipelago off Hainan’s southeastern shore that has a cruise ship terminal, luxury hotels and apartments. “We can’t let this big cake be eaten all by foreign capital.”

Zeng’s development was built with a total investment of 20 billion yuan (USD3.2 billion), of which he put up 45 percent and another 45 percent came from the state-owned infrastructure firm China Communications Construction Co. The property’s skyline is dominated by glinting hotels with steel facades, some of which house luxury condominiums with bathtubs on the balconies. Zeng said he could open a casino in under 30 days if given the permission.

The Boao Forum comes at a time when Washington and Beijing are engaged in trade war brinkmanship over tariffs. China has said the Hainan conference will demonstrate the country’s future prospects for economic growth.

Meanwhile, the drumbeat for casino development in Hainan has grown in recent months. Earlier this year, Bloomberg citing people familiar with the matter reported that government agencies under a party reform group headed by Xi are considering allowing online gaming and sports betting in Hainan, a policy shift that could open the door to physical casinos in the long run.

A balmy climate and sandy beaches are why Hainan, roughly the size of Switzerland, is often dubbed China’s Hawaii. Yet, it has been grappling with its dashed economic potential for almost a decade. It was eight years ago that Beijing designated the island China’s “test case” in developing an “internationally competitive tourist destination.”

At the time, the government said Hainan could explore lotteries related to international sporting events. The news drove speculation that the island could eventually open up to the gambling industry. Then came an investment flurry that pushed up property prices.

The bubble burst by 2012, when it became clear that specific policy concessions for Hainan weren’t imminent, whether legalized gaming or exemption from China’s heavy import duties. Property prices have tumbled from their peak.

Eight years on, new highways, high-speed railways and hotel chains are everywhere in Hainan, but its success as an international hotspot is muddled at best. The island drew about 55 million tourists last year, only about 1 percent of the 5 billion trips made domestically in China. Its visitor numbers are much lower than Asian destinations like Bali or Phuket.

“Hainan has extremely high hopes for President Xi’s visit and hope to receive some supportive policies,” said Liu Feng, a researcher of Hainan Normal University Maritime Silk Road Research Institute. “Designating the island as a tax-free zone, or even just increasing the number of duty-free shopping locations, will inject vitality into Hainan’s tourism development.”

Xi’s visit is timed for the province’s 30th anniversary. Building it up would allow China to keep more of its tourists at home. This would hurt not just Macau but other places like Vietnam and Australia that have sunk billions into attracting Chinese gamblers. Yet, for now, some worry that Chinese regulations make it hard for tourism to flourish in Hainan.

Higher-end cultural offerings are stymied by a censorship regime suspicious of foreign film and art, as well as onerous duties on imports. Property developer Zhang Baoquan, who’s spent more than 10 billion yuan building a complex combining hotels, convention space and a shopping mall in Hainan, dreams of hosting art fairs and film festivals if the province had some kind of a free-trade zone.

Zhang believes policy concessions such as those on a free-trade zone may be on the horizon with Xi’s visit. “The tax support will be the most helpful policies for Hainan,” he said. “This year will be a turning point for this place.”

Meanwhile, MGM through a joint venture with China’s Diaoyutai State Guesthouse has made investments in Hainan and hopes to open two more hotels there. The MGM Grand Sanya in Hainan has about 675 rooms, and is one of the best performing hotels in the southern Sanya area, said William Scott, general manager of MGM’s joint venture with Diaoyutai.

The business has a letter of intent for a Bellagio hotel and is pursuing another hotel in Sanya. The hope is for more government support in areas like air traffic infrastructure to boost tourism, Scott said.

Hainan’s government has commissioned a group of eight scholars to study how to develop gambling tourism there -and how to legalize gambling in China. One member of the group, Pei Guangyi, associate professor at the School of Economics and Management at Hainan Normal University, published a paper in March arguing China should legalize gaming to reduce capital outflows through foreign casinos and introduce a body of regulations.

“Since you can’t stop Chinese people from gambling it is a better solution to make sure that foreign or private capital do not overly profit from it,” he said. MDT/Bloomberg