Economist Henry Lei: ‘Poorer families to face problems’ due to inflation

The lower-income classes will sharply feel the effects of the rising inflation, economist Henry Lei said, in an interview with Macau Daily Times. The price hike is also creating a “dilemma” in the housing sector, the University of Macau professor of economics warned.
“Homeowners don’t want their property to lose value but the people who don’t yet have a house find it very difficult to find one for a reasonable price,” Lei said.
Even though gaming “is recovering well from last year’s slump,” Lei stressed that an over reliance on this sector means Macau is “rather sensitive to global economic disruption”. The economic diversification is another “risky venture” for which there is “no fast solution,” the Faculty of Business Administration coordinator said.

‘One problem is that we have no public venue to host MICE [...] which means we may not be competitive enough against our regional rivals’

One thing is for sure, he added: “We are running short on the number of people needed”. Macau should “face the fact that there are not enough workers” and that imported labour is essential “to support the development of the local economy,” Lei said.

Macau Daily Times (MDT) – In your opinion how is the local economy doing?
Henry Lei (H.L.) – In general, the economy is recovering well from last year’s slump. For example, the gaming sector is doing very well. People may not believe it but the revenue has increased by 75 percent. In addition, the number of unemployed has dropped to less than three percent. However, the inflation has returned and this is the problem we are facing right now. Macau is receiving more and more tourists and the new projects for Cotai may help attract even more. So I am quite optimistic about Macau's economic prospects for the future.

MDT – Is the economy over reliant on gaming?
H.L. – I’m sure both the local and Central Governments are aware of this problem of over dependence on the gaming industry. That’s the reason why, for instance, Beijing ordered Macau not to assign new land plots for casino projects. On the other hand, the Hengqin island development project is hoping to give Macau the land resources it needs to help diversify the economy. In that way, University of Macau’s new campus is a pioneer project. There are also projects for advanced technology and Chinese traditional medicine, which hopefully will help fight the over reliance on gaming. As much as the sector is doing well this year, it always poses risks for public income and, more importantly, to employment.

MDT – What kind of risks?
H.L. – Well, first I would like to say that I believe the Central Government has a policy to deal with these risks. Everyone knows the Beijing Government controls the visa situation and has been helping us on macroeconomic control. So we may not face a sudden reduction on the number of visitors from mainland China. If such a shock were to happen, it would certainly have effects on the real estate business, with a sharp decrease in demand. The forecast number of population would also decrease even more, with many non-resident workers leaving. In fact, it has already dropped.

MDT – Will the new imported labour regulation further slash the number of non-resident workers?
H.L. – I guess it will all depend on the business potential and the estimation of each company’s performance. That will weigh heavily on the number of imported labour to be hired, despite the new law. If the gaming operators are optimistic, they will apply for more non-residents, despite any further restrictions. At least the new law will bring about more transparency in the hiring process, something the businessmen had long been asking for. With the new projects being built in Cotai, there may be again an increase in the number of non-resident workers. We just have to face the fact that there are not enough workers to fill up all those positions and, even more, local residents don’t want to work in a lot of the lower income ones.

‘Running short’ on manpower

MDT – In a very short period, Macau went from a manufacturing hub to a gaming city. Was this transition also successful for the workers?
H.L. – The transition was very rapid but not very smooth. There is a lot of former manufacturing staff now working in casinos, but most of them are dealers. Macau people have not been trained to fill in as middle or high-level managers. Most of these positions are still controlled by foreign workers coming from the US, Hong Kong or Australia. There is clearly a gap in terms of training. Both the casino operators and the Government have offered the manufacturing workers training in hotel and gaming service. For example, the University of Macau has a Management degree on Gaming and Hospitality. But the bachelor’s degree is just one step. It may take 10 years for people to be fully equipped for a middle-level position. The Government should encourage the operators to launch vocational training. One thing is for sure: we are running short on the number of people needed.

MDT – Will this shortage reduce the competitiveness of Macau’s gaming industry?
H.L. – I don’t think so. After all, Macau is still the only place in China where gaming is legal. Most of the visitors come from neighbouring Guangzhou province, so they have almost no transportation costs. We now have a number of large and fully equipped casinos but the local operators will be able to afford the increase in costs, including wages. We need imported labour to support the development of the Macau economy. If we are really keen on becoming an international 24-hour city, then we ideally need three times the normal number of workers, but at least two times as much.

MDT – What’s your take on the new regional gaming rivals?
H.L. – The major rival is definitely Singapore. However, Sands runs resorts both in Singapore and in Macau, so from a strategic point of view the company may not let this become a direct competition. Singapore might become a rival in the high-end service niche for the big-spenders coming from mainland China. In the mass market, Macau will still have the upper hand. Singapore and Macau are just focusing on different markets. For instance, all the restrictions mean that for mainland diplomats and officials it will be harder to go to Singapore than here.

‘If the gaming operators are optimistic, they will apply for more non-residents, despite any further restrictions’

MDT – The operators building new resorts in Cotai are increasingly talking about the Chinese middle-class…
H.L. – It could be that there is a chance to develop this niche. I hear the number of drivers going to pick up clients in mainland China is increasing and that’s why you see so many limousines in Macau. The local market doesn’t necessarily have to rely only on high-end customers, though I’m sure the current VIP-centric situation won’t probably go through any major adjustment.

Public MICE venue needed

MDT – Which sectors should Macau bet on for economic diversification?
H.L. – I think all services related to gaming have good prospects. The convention and exhibition sector is already part of the Government’s strategic plan. You just have to look at The Venetian and the various kinds of exhibitions it has hosted. We have the potential to expand the scale of this business in Macau. But one problem is that we have no public venue to host MICE [Meetings, Incentives, Conferences, Exhibitions] events. They always have to take place in private venues, which means we may not be competitive enough against our regional rivals, especially Hong Kong. A public venue built and run by the Government would charge lower prices. The Executive should try to consider this and also more training in this area.

MDT – What about areas also mentioned by the Government, like Chinese traditional medicine or creative industries?
H.L. – We might need a multidimensional development. But the problem is also the necessary investment and the risks linked to diversification. The cooperation with the Zhuhai Special Economic Zone [to build the Chinese Traditional Medicine Scientific and Industrial Park], with the blessing of the Central Government, is a good idea. But we should work with mainland universities that already have experience in this area. In any case, it’s a risky venture. It may take a decade and a lot of investment to bear any fruits. We simply have no fast solution to diversify the economy.

MDT – Meanwhile, is the trade deficit a problem for Macau?
H.L. – It’s true that we have a huge trade deficit, but Macau exports a lot of services so it might not be a huge problem. The public opinion mainly focuses on inflation and housing costs, before transportation and imported labour. If we were to conduct a survey, the number one problem would surely be inflation or housing.

‘No easy solution’ for housing prices

MDT – The inflation is already close to three percent. What are the likely effects?
H.L. – The inflation is already taking its toll on the competitiveness of the Macau economy. The Hong Kong tourists can see the prices in Macau coming close to local ones. On the other hand, the property prices are closely related to inflation. With rentals going up, the prices of common goods also rise. Macau is starting to face a dilemma similar to the one in Hong Kong: homeowners don’t want their property to lose value but the people who don’t yet have a house find it very difficult to find one for a reasonable price. The public housing launched by the Government could help a lot, but not the middle-class.

MDT – So what is the way out of this housing dilemma?
H.L. – That is very complicated to say. The Government could build different layers of public housing, with different prices. But then it would have to face conflicting interests, from homeowners to developers. There is no easy solution.

‘Gaming always poses risks for public income and, more importantly, to employment’

MDT – How much will the inflation affect the lower-income classes?
H.L. – It’s true that the current inflation doesn’t seem much compared to the 9.22 percent value it reached two years ago, but it will still affect some people in a more serious manner. The possible appreciation of the Yuan has been in the news and some people even say it could rise by two percent in just one year. That would surely have a very serious impact on Macau because almost 60 percent of our imports come from mainland China. And our poor spend a higher percentage on food and other basic goods than the rest of the population. The weather hasn’t helped either and the prices are going to increase because of the problems in Russia, Thailand and China. The poorer families will face problems.

MDT – How will the inflation affect the tourism and gaming sectors?
H.L. – The inflation will also affect China, the main market for the gaming industry. But the appreciation of the Yuan means people from the mainland will have a higher purchasing power. I’m still optimistic the gaming sector won’t be seriously affected by inflation. More relevant will be the evolution of the Beijing policy and the global economy. If the Central Government observes any negative impact of the gaming boom, they might tighten the visa policy. That would affect Macau more than inflation. On the other hand, the wellbeing of the local economy relies on gaming, an industry that is easily affected by the status of the global economy. In fact, it’s only now fully recovering from the worldwide financial crisis. Macau is rather sensitive to global economic disruption. A delayed recovery of the US and the EU [European Union] economies will inevitably affect China, an economy dependent on exports and our main supply market.

MDT – Among others, lawmaker Au Kam San proposed pegging the Pataca to the Yuan. Would it help in anyway?
H.L. – First of all, technically it’s impossible to peg because the Yuan is not convertible, there are a lot of currency restrictions and controls. One other possibility would be to appreciate the Pataca up to a 1 to 1 ratio with the Hong Kong Dollar. Maybe the Pataca could even be stronger than the Hong Kong Dollar because the economy is going so well. However, a lot of people have deposits and assets in Hong Kong Dollar, so there would be an immediate panic. If the inflation slowly cuts down on your purchasing power, the Pataca appreciation would mean a loss of accumulated wealth. I can understand why AMCM [Monetary Authority of Macau] is reluctant to change the current system. To have a peg is better than not because Macau’s small size and open economy would make it difficult to keep some financial stability.

MDT – But the peg also has some disadvantages…
H.L. – All systems have drawbacks. Right now we are doing well, so would need to raise the interest rates, instead of keeping them close to zero. But we are not allowed to do that because of our peg with the Hong Kong Dollar and, indirectly, with the US Dollar. We have already experience all the possible problems because of this mismatch between our inflation and the US one. The American economy is still recovering so the interest rates will continue near zero until at least the first half of next year.

MDT – How will the Macau economy evolve in the next few years?
H.L. – We will still depend on gaming as a cash cow to support the economy and the employment. But the Government will invest more in new areas and there will be increased public spending because of some big projects such as the Light Rail Transit system. It will help the economy, though the inflation will continue. I think in the next two, three years there will be no major changes in the big picture. The Chinese economy provides a lot of support and steady market of customers but if the gaming grows too fast, we can be sure the Central Government will tighten the visa policy. Furthermore, if we face any shocks coming from the US, the EU or China – for instance the risks linked to the property market bubble – Macau should be affected directly.