What it means
Macau was administered by Portugal for centuries before being handed to China in December 1999. Under the arrangement known as one country, two systems, it keeps its own currency, customs territory, legal system and tax rules for a long period.
Foreign relations and defence are the responsibility of the central government. The local currency is the pataca, which is pegged to the Hong Kong dollar, which in turn is pegged to the US dollar.
This chain of pegs means that exchange rate movements between the pataca and the dollar are limited. Businesses that bill in Hong Kong dollars or patacas can plan with reasonable confidence.
The economy is dominated by gaming. The territory is one of the world's largest casino markets by revenue, and casino taxes make up a very large share of government income.
This dependence gives Macau a high income per person but also exposes it to swings in visitor numbers, particularly from mainland China, and to changes in gaming regulation. For businesses, the region has several attractions.
It has low taxes by international standards, strong ties to both Portuguese-speaking countries and mainland China, and access to the neighbouring Greater Bay Area. At the same time, the small domestic market and concentration in one industry are risks, which is why policymakers have encouraged diversification into conventions, culture and finance.
The financial sector is small but includes banks and offshore services. Anyone dealing with the territory should check the current rules on tax, licensing and currency, because they can change.
In practice
Real-world examples.
Example
A hotel group opens a resort in Macau and sets room prices in Hong Kong dollars. Its finance team uses the currency pegs to forecast margins without hedging, and keeps most cash in a Hong Kong dollar account.
Example
A conference organiser considers Macau as a venue because it has hotels, a strong transport link and a policy of promoting business events. She compares the all-in cost per delegate with other Asian cities before deciding.
Example
A fund manager reviews listed casino operators and notes that their results depend on visitor numbers and gaming rules. She stress-tests earnings for a 30% fall in visitors, because the government and the operators are both tied to the same source of revenue.
Formula
Calculation
Gaming tax revenue = Gross gaming revenue x Gaming tax rate
Suppose, purely for illustration, that casinos in a month report gross gaming revenue of $2,000,000,000 and the effective tax rate is 35%. Gaming tax revenue = 2,000,000,000 x 0.35 = $700,000,000. If gross gaming revenue falls by 20% to $1,600,000,000, the tax would fall to 1,600,000,000 x 0.35 = $560,000,000, a drop of $140,000,000. This is why heavy dependence on one industry makes public finances volatile.Case study
Seen in the real world.
Lotus Bay Entertainment is an illustrative, fictional operator planning a new resort in Macau SAR, China. Its finance team built a model with annual gross revenue of $800,000,000, of which 60% came from gaming and 40% from hotels, dining and retail. They noticed that the margin on the non-gaming side was much lower.
A stress test with a 25% drop in visitors cut profit by well over half because costs were largely fixed. The board decided to phase the build over three stages and to widen the non-gaming offering to attract longer stays. In this fictional story, the lesson was that dependence on a single revenue source calls for conservative financing.
The board also reviewed how the territory's currency pegs affected its borrowing. Because the pataca moves with the Hong Kong dollar and the US dollar, loans in those currencies carried little exchange risk, and the fictional company chose to borrow in Hong Kong dollars.
Watch out
Common mistakes.
- Assuming Macau uses the same currency, laws and tax system as mainland China, when it keeps its own under the special administrative region arrangement.
- Assuming that high casino revenue means a stable economy, when it makes growth sensitive to visitor numbers and regulation.
- Confusing Macau with Hong Kong, when they are separate regions with separate currencies, though both are special administrative regions.
Questions
People also ask.
What currency does Macau use?
It uses the pataca, which is pegged to the Hong Kong dollar, though Hong Kong dollars are widely accepted, and prices in many shops and hotels are quoted in either currency.
Why is it called a special administrative region?
It is part of China but has a high degree of autonomy in most matters except foreign affairs and defence, under the one country, two systems principle.
Why is the economy concentrated in gaming?
Casino licences, large resorts and visitor flows from the mainland have made gaming the dominant source of income, which policymakers are trying to diversify by encouraging conventions, culture, tourism and financial services.
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