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ABSTRACT
Fast expansion in casino gaming is widely perceived as an underlying reason for housing bubbles in tourist resorts such as Macao. Yet it remains unclear whether such bubbles have any bearing on income inequality that comes with tourism expansion. This paper provides a formal explanation for the inequality-housing price nexus by using a vector autoregressive model with exogenous variables (VARX) and an autoregressive distributed lag model (ARDL). We find that casino tourism expansion plays a fundamental role for both income inequality heightening and housing price hiking, with rising inequality also contributing significantly to housing bubbles. Our empirical findings accord well with theoretical predictions made in this paper. Useful policy implications can then be derived from those findings.
Acknowledgments
We wish to thank the guest editor Professor Xinpeng Xu and two anonymous reviewers for their helpful comments and suggestions on the earlier version of the manuscript.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. A flat tax is imposed on casino revenue in Macao and its rate at 40% is regarded as ‘too high’ by some gaming analysts (Pessanha Citation2008). Two thirds of gaming revenue in 2013 came from closed-door VIP rooms controlled by ‘junkets’ – local companies that brought high-rolling gamblers from mainland China on extravagant package deals and loaded them up with credit. Multimillion-U.S. dollar bets and private-jet flights were common, as were activities of money laundering and links to organized crime. However, the once-untouchable junkets who received huge commissions have now felt the chill of an unprecedented anti-corruption campaign in mainland China (Kaiman Citation2014).
2. Equation (1) can be used as a universal formulation for many tradable assets after some changes. For example, this formulation applies to stock markets if (1+g)t−1R is changed to dividend payout DPt and to bond markets if (1+g)t−1R is replaced by (constant) coupon payment CP (with T holding periods shorter than the term to maturity).
3. Strong economic growth has attracted massive immigrants to enter Macao, causing its population to grow fast. Most of those immigrants rent apartments to live in Macao. This is the very reason the consumption demand for housing is considered here. The investment demand for housing in Macao arises via capital inflows for speculative trading in local properties. Those flows attempt to profit from the expected rise in future housing bubbles and represent a rise in forex reserves that will be addressed shortly.
4. We abuse notations for expository simplicity and use the same index q to indicate the extent of inequality under different circumstances. Doing so is for deriving qualitative rather than quantitative results in a neat way.
5. Macao’s currency, pataca in MOP units, is printed by two local commercial banks, not by its government for fiscal use or for policy manipulation. This currency is anchored by Hong Kong dollar that in turn is anchored by U.S. dollar, with 8 MOP = 1 USD as the exchange rate target. Yet the Macao Monetary Authority still deploys certain functions of central banking, albeit not in a frequent or substantial manner (Chan Citation2004).
6. The money multiplier λ is affected by reserves as well as currency relative to deposits. Reserve requirements are abolished by some central banks, and are not regulated by any currency boards. Yet private banks need to deposit minimum reserves at a currency board for balance settlements with other banks, so that λ is still applicable to Macao.
7. The tax rate is 1%, 2%, and 3% on the 1st one million, two-to-four million, and more than four million Macao dollar purchase price of a housing unit. First-time local homebuyers are exempted from taxation for the 1st three million dollar housing price. Non-residents have to pay an extra 10% tax on top of the above tax burden on locals. Special stamp duties for both locals and non-locals are levied at 20% of selling prices if housing units are resold within one year of their purchase and at 10% if resale transactions are made in two years after the purchase.
8. The constancy of velocity is widely used in classical economics, but may not be supported by some datasets. Nonetheless, many monetarists believe that velocity is largely stable or predictable, though not strictly constant (reflecting only transaction technology). We follow the classical view that movements in the price level result solely from changes in the quantity of money. Monetary neutrality is likely to hold in the long run, with money growth transmitted entirely to price inflation or housing bubbles.
9. The index is designed in the following manner. Let µ, g, and z be the VIP share in GGR, China’s GDP growth, and the number of its officials facing prosecution for corruption, respectively. The number of mainland Chinese visits to Macao is adjusted through multiplying their raw data by (1 + g)/(1 +µoz) to compute their effective arrivals at its casinos, where µo is the average value of µ across the last 21 months up to October 2015, a period that saw an intensified anti-corruption in China. Obviously, GGR is affected by China’s income growth and anti-corruption intensity as well as Macao’s reliance on VIP business.
10. The same, positive sign of the long- and short-run coefficient estimates for levels of, and changes in, a regressor indicates that a rising level of the regressor raises the value of the regressand at an increasing rate.
11. The ‘cash sharing scheme’ has been adopted for about one decade by the Macao government, which transfers USD 1,110 to each citizen and USD 650 to each permanent resident every year.
12. Macao has its own currency that is linked to the US dollar via the HK dollar, with all three currencies monetarily independent of China’s currency (RMB). Macao housing often comes under pressure for price hike when the RMB depreciates in a persistent and substantial manner.