China is said to mull legal gambling on Hainan in key shift

The scenery of Yongxing Island in Sansha City, Hainan

China is drafting a proposal to allow gambling on Hainan Island, people familiar with the talks said, in what would be an unprecedented move that could reshape gaming in China’s territories and transform the economy of a strategic southern province.

Government agencies under a party reform group headed by President Xi Jinping are considering allowing online gaming, a lottery or sports betting in Hainan, said the people, who asked not to be identified because the discussions aren’t public. The proposal, which is still in an early stage, could open the door to physical casinos over the long term, two of the people said. China currently bans gambling and casinos on the mainland.

The proposal is part of a wider plan that includes relaxing visa rules and building a new airport to draw more foreign tourists to Hainan, two of the people said. That comes as the province faces a fiscal deficit and contends with the debt woes of HNA Group Co., its biggest conglomerate, which is facing pressure from creditors after a global acquisition spree.

An index of Macau casino stocks tumbled on the news. Wynn Macau Ltd. slid as much as 6.7 percent before closing 0.2 percent lower. MGM China Holdings Ltd. declined 1.5 percent while Sands China Ltd. fell 1.4 percent.

“I think investors were shocked – I’m a bit surprised,” said Sam Chi Yung, a Hong Kong based strategist with South China Financial Holdings Ltd. “It’s difficult to say what the impact will be on their profits as it all depends on China’s policy and how they arrange the license. But what’s sure is that people going to Macau to gamble will drop.”

Hainan, roughly the size of Switzerland, is often referred to as China’s Hawaii for its beautiful beaches. It also serves as a jumping off point for Chinese naval and air force patrols in the South China Sea.

The people didn’t comment on what laws would need to change or the timeframe for implementation. Provincial officials were preparing for a possible visit by Xi in the coming months to promote development on the island, two people said. That trip would kickstart events marking the 40th anniversary of China’s embrace of foreign investment under Deng Xiaoping, they said.

The Hainan plan would mark a dramatic shift in China’s approach toward gambling and could directly threaten the USD33 billion casino industry in Macau – the world’s largest gaming hub with revenues five times larger than Las Vegas. Macau has been shifting to attract Chinese tourists and families to the territory, which is the same market that Hainan currently draws.

China’s leaders have agreed to build a new international airport in the area of Dongfang city on Hainan’s western coast, according to the people familiar with the situation, who didn’t share more specifics on plans to ease visa requirements. The island now has three international airports, all located on the eastern coast.

The State Council Information Office, which represents the central government, referred questions to provincial officials. Faxed questions to the Hainan government weren’t immediately answered.

China bans gambling everywhere except Macau and Hong Kong, which was once ruled by Britain. Currently, it’s against the law to open casinos, organize gambling, profit from gambling, set up online betting websites and market overseas casinos to Chinese citizens. It’s also illegal to sell lottery tickets without approval from the Chinese government.

Authorities have previously sought to crack down on property agents who have mentioned the possibility that Hainan would allow gambling.

Hainan police “criticized and educated” six people for “fabricating and spreading rumors online about the real estate market,” the provincial government’s official news portal Hinews.cn reported Jan. 30. It said some real estate agencies had disrupted the economic and social order by circulating rumors, such as “Hainan Island will restrict people from entering” and “Hainan will open its gaming industry.”

Allowing gaming on the mainland would be one way for Chinese authorities to limit capital outflows and ensure gaming revenue benefits the provincial economy.

Xi’s corruption crackdown in 2014 sent Macau gaming revenue into a slump for more than two years, prompting it to become a more family-friendly destination to target leisure gamblers and tourists. About 70 percent of Macau visitors are from mainland China.

Chinese authorities have also cracked down on gambling-related activities. More than 10 employees of Australia-based Crown Resorts Ltd., controlled by billionaire James Packer, were arrested in 2016 and sentenced to months in jail for illegally promoting gaming.

Although gambling is illegal throughout China, the concept isn’t new to Hainan. The State Council encouraged Hainan to “explore a betting-type sports lottery” in 2009 guidelines to turn it into an international tourism island.

A casino bar with baccarat tables opened in the resort town of Sanya in 2012 where players earned points they could trade for accommodation and shopping, according to a Reuters report. It was shut down shortly after the report. The owner, Zhang Baoquan, told Reuters the government monitored the casino to test the market.

While China is the world’s biggest tourism spender, it has had a tougher time attracting travelers from abroad: In 2016, it drew 31 million visitors, less than half of the number welcomed by the U.S.

China has already poured billions of dollars into new highways, high-speed railways and other projects in Hainan, attracting prominent chains such as Hilton, Westin and St. Regis. Still, Hainan took in far fewer overseas visitors than other premier Asian tourist destinations such as Bali, Phuket or Jeju in South Korea.

Chinese officials have shown a particular interest in Hainan in recent months, suggesting a coordinated effort to promote the island. Vice Premier Liu Yandong urged local leaders to work to attract international tourists during a Jan. 13 visit.

One hurdle is the state of conglomerate HNA, which owns the province’s airline and two of its airports. HNA told major creditors and provincial government officials last week that it expects a potential shortfall of at least 15 billion yuan ($2.4 billion) in the first quarter, Bloomberg News reported Tuesday, citing people with knowledge of the matter said.

Companies linked to HNA secured 7.8 billion yuan in long-term loans from Chinese banks to finance an expansion project in Meilan Airport in Hainan, according to a filing with the Hong Kong stock exchange late Thursday. Half of the loan will be allocated to HNA Infrastructure Co. and the other half to Haikou Meilan International Airport Co., with the loan being guaranteed by HNA Holding Group. Keith Zhai, Daniela Wei, Bloomberg