Brilliant fireworks exploded in the night sky as Portugal, with great fanfare, handed back the administration of Macau to Beijing on the eve of December 19. The Portuguese managed the 23-square-kilometre enclave at the mouth of the Pearl River since 1557, and it served them well as a trading post and a toehold in Asia. Their influence over more than four centuries imparted to Macau a distinctive architecture, flavourful food and a hybrid culture. Now that the Portuguese have gone, the question remains: What does the future hold for China's newest Special Administrative Region and what competitive advantages can its new leaders exploit to ensure a return to growth and prosperity?
There are several key reasons to believe that Macau will prosper. For one, both the new rulers and the old ones want it to flourish - the Portuguese, because they've had a bad track record with their other former outposts (Mozambique, Angola and East Timor spring to mind) and the Chinese, to prove to Taiwan that reunification is a desirable goal.
For another, the local government has finally made headway in stamping out the nasty criminal groups known as "triads" that have been shooting each other up in broad daylight and dampening tourists' enthusiasm for the place. Since 1996, the triads had been engaged in a vicious turf war over the control of fringes of the gaming industry: attracting junket customers to the VIP gambling suites, loansharking and prostitution. Their struggle claimed about 40 lives and made headlines worldwide. But in November, the Macau courts sentenced 14K leader "Broken Tooth" Wan Kuok-koi to 15 years in prison and other members of his gang - the dominant triad group - were handed down lesser terms. (On the same day, one of Wan's alleged cohorts was executed on the mainland after his own conviction by a Chinese court.)
The judge who sentenced Wan left Macau for an extended holiday, and it was uncertain whether he would return despite his claims that he was not afraid of triad retribution. Macau cab drivers claim Wan is living the high life in specially built maximum-security prison, with his own high-tech sound system and regular deliveries of takeout food. No matter. If Wan's incarceration doesn't give triads pause, the People's Liberation Army troops - 10,000 of them - now stationed in Macau almost certainly will.
The single biggest source of revenue for Macau remains the gaming industry, principally horse racing and its 10 casinos. In spite of government attempts to diversify away from this revenue stream, gambling earnings as a proportion of the total rose in the past decade. From 32% of total revenue in 1992, earnings hit 56.9% in 1998. But there are signs Macau's dependency on gaming may be lessening. Of the 8.2 billion patacas (US$1 billion) collected in revenue in the first nine months of 1999, only 3.4 billion patacas, or 41%, came from gambling.
Macau's is an open economy, vulnerable to external shocks and the economic developments of its neighbours. Two years' of poor growth in China and the worst recession in Hong Kong in living memory have taken their toll on Macau, according to Manuela Morgado, the former Portuguese chairman and chief executive of the de facto central bank, the Autoridade Monetaria e Cambial de Macau. But Macau's fortunes were waning even before the onset of the Asian financial crisis: In 1996, gross domestic product fell 0.5%. It dipped by 0.1% in 1997 before sliding by 4% in 1998. Unemployment has risen also, from 3.6% in 1995 to 4.6% in 1998 and 5.5% in September, 1999.
On the upside, last September, the number of visitors arriving on package tours rose 29.1% from a year earlier, to 80,981. The mainland accounted for more than half. China, Taiwan and Japan together represented 85.4% of visitors on package tours, according to the statistics and census department.
While overall tourist arrivals were up 5.3% in the first nine months to 5.5 million, the number of Hong Kong visitors - mostly daytrippers - had slipped by 13.9% to 3.2 million. The tourism industry continues to struggle with low hotel-occupancy rates, which average just 47.7%. What's more, most visitors are shortstayers, staying just 1.39 nights. Encouraging people to stay to see the sights is crucial to building up the non-gaming side of the tourism industry. "Macau has 7 million visitors a year. If they would stay one more day, our economy could climb," says Eric Yeung, director of the Perfekta Toys and head of the Macau Productivity and Technology Transfer Centre.
Yeung, who had been widely touted as a candidate for Chief Executive (banker Edmund Ho, pictured, won out) and was a member of the appointing selection committee, is sanguine about Macau's prospects. The Portuguese administration did some good work in "bits and pieces" Yeung says, citing the development of museums and restoration of much of the historic architecture. This, he adds, must be stepped up.
Still, local shopkeepers who depend mainly on tourists are confident that business will remain buoyant. Cathy Leong of Ngai Chi Pou Furniture, an antique shop in the street leading up to the Macau trademark, the ruins of St. Paul's, is looking forward to doing business post-handover. Previously, her customers were mostly Westerners who would buy only a single piece of furniture. "With the handover," she says, "there will be more mainland Chinese visitors, and they buy a whole house-full of furniture."
Dandy Bao, the financial manager of the Seng Fung Jewellery shop, is just as optimistic. He estimates that about 40% of his customers are mainland Chinese; the rest are locals. Post-handover, he expects the number of Western visitors to Macau will drop off - "They will think it is just like Hong Kong, another city in China" - but the number of mainland Chinese customers will climb. This is good, Bao says: "The Chinese like gold!"
For further evidence of confidence in Macau's tourism potential, look no further than the new US$16 million spa and fitness facilities - including a flying-trapeze school and rock-climbing tower - at the Mandarin Oriental in Macau. Yeung also sees potential in attracting conferences, exhibitions and special events. Macau already has a proven track record with annual events such as the Grand Prix and fireworks festivals. Earlier this year, it also played host to a meeting of central bankers at the impressive new convention and exhibition centre (built to accommodate the handover festivities).
Like other small and open economies around the world, Macau's best hopes for a prosperous future lie in carving out a niche rather than competing head on with its bigger neighbours. Tourism and gambling are only half the picture. As a conduit for manufactured goods from the Special Economic Zone of Zhuhai, Macau has enjoyed benefits similar to those Hong Kong enjoys based on its proximity to Shenzhen. Macau imports about US$5 billion worth of goods from China, re-exporting the bulk to the United States (48%) and the European Union (about 35%).
Macau, like Hong Kong, has been able to build on its position as a free port providing access to the Chinese hinterland. The longer term outlook, however, is uncertain. China's impending entry into the World Trade Organisation (WTO) is likely to undermine the importance of the free ports. For Macau, there is a further ramification: China's entry into the WTO could spell an end to the quota system, of which Macau is a big beneficiary. With Macau's quota gone, the outlook for the textile industry in the enclave could be grim.
Yeung remains bullish, however. "Only those who don't want to change will not be able to survive." He says the opening of the mainland market two decades ago had been a big opportunity for Hong Kong and Macau business people. The further opening of the market should not be viewed as a threat to their position, but as an extension of that opportunity.
Macau can carve its own niche in building relations between small and medium-sized enterprises (SMEs), Yeung says. The decision to hold the meeting of the European Union's Eureka project in Macau last year, the first outside Europe, bodes well for Macau. About 1,200 participants took part in discussions on ways to improve links between SMEs in the EU and the mainland and to encourage innovation. Macau is to host another meeting of the group in March.
The enclave has a small industrial base of its own, primarily engaged in the manufacture of textiles and apparel, which account for about 80% of total exports. For them, Yeung says the future lies in a drive towards value-added manufacturing, rather than a vain attempt to build scale or market share. Use of new materials, designing rather than simple assembly and using technology to make manufacturers more responsive and flexible to clients' needs are all ways Yeung sees as adding value to Macau's manufacturing base.
One of the more positive aspects of Macau's economy is its property market. There is an oversupply of finished apartments, which Yeung puts at 30,000 units (unofficial estimates put the number of empty, unsold apartments at more than 60,000), compared with 120,000 households. Most of the oversupply has been built with foreign money from Hong Kong and mainland China. The exposure of Macau's economy to the problem is minimal, he said. The corollary of this is easy to see: For potential investors looking for back-office capacity for Hong Kong, this spells lower costs.
Macau seems to have weathered its recent problems well. For the first nine months of this year the trade surplus rose 31.1% year on year to 930 million patacas, which the monetary authority attributes to a faster rise in exports rather than a contraction in imports.
Yeung says it's unrealistic to expect the return to economic health to be "like opening instant noodles". The process of rebuilding confidence will be gradual, and will require ingenuity and commitment from Macau's business community, Yeung says, but the future is there for the taking.