It's the "Las Vegas of Asia." Sitting at the mouth of the Pearl River Delta -- about an hour's ferry ride from Hong Kong on the south end of mainland China, the former Portuguese colony of Macau is the only place in China where gambling is legal. And in the past decade, it has developed into one of the world's biggest gambling destinations.
In 2013, gaming revenue in Macau hit $45 billion -- nearly seven times larger than Las Vegas.
Many of the large casino players, like Wynn Resorts (Nasdaq: WYNN) and Las Vegas Sands (NYSE: LVS), were among the first companies to secure a gambling license in Macau, opening their first casinos there in 2006. The timing couldn't have been better as gaming revenues soared.
And you can see, shares of those stocks climbed right along with those revenues:
The Wild West Of The 21st Century
There was just one problem... Prior to 2014, it wasn't only gambling that took place in Macau...
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As signs began to creep up in 2014 that China's economy was not growing as fast as it once was, and the government enacted tighter regulations and cracked down on corruption in Macau, which was rampant.
At the time, Macau was a 21st-century version of the Wild West.
With lax rules and regulations and an embarrassing amount of cash being tossed around, Macau became a massive pipeline for moving money out of China in order to beat the government's strict currency controls.
To sidestep the strict currency laws, many would simply go to a store, buy an expensive piece of merchandise using a bank card and then immediately sell the item back to the retailer minus a commission. The retailer would then give you cash. All the while, you haven't even touched or moved the piece of merchandise.
This was what was happening all over the place in Macau.
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And on the gambling side of things, there was an informal and unregulated financial system known as junkets.
Junket operators -- who typically had ties to organized crime -- would lure clientele to Macau, lend them money to bet with and later handle the often messy business of debt collection. At one point, junkets accounted for nearly two-thirds, or roughly $30 billion, of Macau's casino revenue.