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We’ve been a little cautious about sequential VIP volume growth as Macau works its way through the summer.

While we clearly haven’t seen any evidence of a slowdown, our concern surrounds the historical 9 month lag between Mainland China tightening (higher discount rate and bank reserve requirement) and VIP volumes, which we’ve shown to be statistically significant (see our note: A VIP SLOWDOWN IN THE CARDS? (05/22/11).  Now the concern seems to be growing in the junket community as well.

While we need to do some more work in this area, it appears that some junkets fear that the significant underground banking industry in China is becoming a more attractive option for cash deposits than junket operators.  VIP liquidity is somewhat fueled by investors who get a fixed return on their money deposited with junkets.  That yield has been higher than the above board Chinese banks so there’s been no issue with keeping the junket liquidity engine pumping.  Now that government credit restrictions are tying the hands of the big banks, the underground banks have moved in to fill the significant credit demand.  With that kind of demand, these banks can afford to pay higher deposit rates than the big banks and even the junket operators.  Thus, money may start to move from the junkets to the underground banks.  Obviously, this could constrict junket liquidity, junket play, and ultimately VIP casino revenues.

While June has certainly been much slower than May, we cannot yet attribute the sequential slowdown to lower junket liquidity.  June is seasonally slower and May benefited from high hold.  We will be watching this closely and continuing to talk to market participants and will update you on any further findings.  In the meantime, we just wanted to point out the potential of this issue as it may be significant.