Hong Kong's casino
24 November 2004
You may have heard that the Liberal Party wants to build a casino on Lantau. Keep this under your hat - it's our little secret. Hong Kong already has a casino. You thought this was illegal, but it isn't - in fact, the biggest gambling den is a legally protected monopoly. Hundreds of "facilitators" will even provide you with credit to assist in placing your bets and advice on which bets to make. Even the Government is in on it - they take a piece of every transaction.
We speak, of course, of the Stock Exchange. Who needs Macau when you've got Macau concept stocks to gamble on? The Government gets its cut off the top - 0.2% on each transaction in stamp duty and 0.007% to fund the gambling regulator and the broker-default compensation fund. The brokers provide gambling credit as margin finance, and the tycoons provide an endless supply of shiny M- chips to play with. And if it's not M-chips, then in the past it has been dot-com chips, GEM stocks, red chips or (coming soon) rinky-dinky instruments like callable bull/bear contracts.
Recently the debate began on what to do with the exchange's trading floor, the lease of which expires in October next year. A rather hum-drum proposal was reached in which the lease will be renewed and a small portion of the trading floor will be retained for brokers who are willing to pay for the booths. Many will just use it as a backup facility, so we can look forward to the appearance of a shrunken exchange with no action, while the real frenzy takes place electronically on trading screens. The rest of the floor will be converted into other uses, including an exhibition area and a cultural piazza for ritual roast pig-chopping to celebrate new listings.
Quite honestly this proposal lacks imagination and market savvy. What we really need is to convert the trading booths into slot machines. Lots of them. And the lovely green baize of the blackjack table. And roulette wheels with stock codes marked on them. The zero goes to the house - we call that transaction levy and stamp duty. We could even give the slot-players red jackets to recreate the feel of the old trading floor. An artist's impression of the renovated trading floor is on the right - minus the jackets.
Yes, our trading hall is the natural place for Hong Kong's first legal casino floor.
Joking aside, let's send a serious message here - it is human nature to risk money on the outcome of future events. That is what we call investment and insurance. The Government's continued resistance to legalised and properly licensed gambling is contradictory to the fact that we are all placing bets with each other every day on the Stock and Futures Exchanges. Yet apart from the Government-sanctioned monopoly of the Hong Kong Jockey Club, which takes bets on horses and football and runs a lottery, it is illegal to operate a gambling establishment or even to place bets with offshore bookmakers and casinos from Hong Kong. The Government professes a belief in free markets but permits a monopoly in gambling with strictly prescribed types of bets on only 2 sports.
But it's OK to buy warrants on M-chips or short-sell stocks and it is even encouraged to buy a property with a 95% mortgage. The policy is inconsistent and hypocritical. Gambling should be legalised and liberalised.
Vast law-enforcement resources are spent on policing, prosecuting and judging gambling dens and bookmakers which operate without any kind of financial oversight, and the criminal underworld thrives on this activity simply because it is illegal. If bookmaking were legal and licensed, you wouldn't want to deal with a triad and a source of their revenue would be eroded.
The fact that a small proportion of the population are gambling addicts or alcoholics is not a sufficient reason to ban everyone from betting or drinking alcohol. America tried that with prohibition from 1920 to 1933 and it was a complete failure in every social objective.
The HKJC has been calling for a shift in taxation policy so that instead of taking an average 13.5% of each bet in duty, the Government takes a tax on profits. We support that, but only if at the same time the HKJC loses its monopoly, and we allow any properly capitalised company to take bets on anything it likes, whether it is horses, elections or tomorrow's air pollution readings. This should be regulated by a Betting Commission that checks that the firms have sufficient resources to honour their bets, just like insurance companies do. The Commission would also enter into mutual recognition with overseas betting regulators, and the anti-competitive ban on offshore betting should be scrapped. It should be legal for HK residents to bet with overseas firms as well as HK firms. After all, it's not illegal for a HK resident to pick up the phone and buy shares in Frankfurt or futures contracts in Chicago.
The World Trade Organisation's Dispute Settlement Body on 10-Nov-04 issued a report (page 272) ruling against the United States for prohibiting cross-border gambling in a case brought by the Caribbean state of Antigua and Barbuda. The US will probably appeal. As a member of the WTO, Hong Kong will ultimately be affected by this ruling.
The liberalisation of betting would create a lot of employment and broaden the tax revenue base. There is also no reason to prohibit electronic exchanges for people to make bets with each other, such as betfair.com and tradesports.com. Globally, race tracks and bookmakers, who have long enjoyed a one-sided market, whinge that exchanges make it easier to back a losing horse - but you can do that just by betting on all the others to win, and the complaint is nullified when you consider that they already allow you to bet against a football team by betting on the other side to win. Electronic exchanges can also keep audit trails of people's bets, while cash bookmakers cannot, so exchanges are actually able to assist in the never-ending battle against match-fixing and race-fixing.
In Hong Kong's case, the HKJC would argue that gambling supports charitable causes. It's their fig leaf for keeping a monopoly - but the truth is that only about 1% of each bet goes to charity, while over 5% goes to running the club and about 13.5% in tax. In a liberalised gambling regime, the Government could continue to divert part of its tax revenue to charitable causes (many of which should form part of our Government's social safety-net anyway), including counselling services for those who are addicted to gambling, whether it is on the stock market or on sports.
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