Macau’s economy is expanding rapidly, foreign investments are projected to boost growth in the next few years and inflation remains under control.
Macau’s exclusive casino legitimacy in China means that half of Macau’s economic output comes from gambling-related industries.
Macau is developing non-leisure industry activities such as foreign trade centres, logistics, back offices and offshore business centres with tax incentives to attract investment.
Clearing in Macau is predominantly paper-based with no real-time gross settlement (RTGS) or automated clearing houses (ACHs), though Society for Worldwide Interbank Financial Telecommunications (SWIFT) is used to supplement the absence of electronic clearings.
Economic data suggest that Macau’s economy is expanding rapidly. Given its small base, foreign investments are projected to boost growth at a strong rate in the next few years. Despite rapid economic growth, inflation remains under control. Macau’s currency, the Macau patacas (MOP), is linked to the Hong Kong dollar (HKD) at a stable rate of MOP1.03 to HKD1 and Macau bank interest rates follow Hong Kong’s interest rates. As a result, HKD exchange and interest rate fluctuations have an impact on Macau’s economy. The MOP is also closely linked to the renminbi (RMB). It has been listed in banks in China and is in circulation along the Pearl River Delta.
Economic activities under the category of public administration, gambling and other services contributed more than one half of Macau’s economic output. Macau’s core economic strength is its exclusive casino legitimacy in China. As a result, economic activities, including the operation of restaurants and hotels, are located near casinos. Net foreign assets amounted to about MOP115bn in 2003 and the region’s fiscal balance is in surplus.
Tax incentives to attract investment into Macau has also resulted in growth in non-leisure related industries, including the development of foreign trade centres, logistics centres, back offices and offshore business centres.
Banking Industry Overview
There are no exchange control regulations in operation in Macau, resulting in 40% of export payments made in the local currency being surrendered to the government. The banking sector, numbering 27 banks in total, comprises primary international banks, which are governed by the Macau Monetary Authority, a quasi-central bank organisation. Within the financial sector there is also the Post Savings Office (Caixa Econimica Postal), which is classified as a credit institution.
The special administrative region (SAR) government’s Financial System Act 1993 is a key piece of legislation that adopts the recommendations of the Basel Committee on Banking Supervision and the efforts of the European Union to achieve harmonisation in banking legislation while drawing on the experiences of countries and territories whose financial systems are similar to Macau’s.
Clearing and Settlement Systems
Macau’s clearing is predominantly paper based with no real-time gross settlement (RTGS) or automated clearing houses (ACHs) in existence, though Society for Worldwide Interbank Financial Telecommunications (SWIFT) is used to supplement the absence of electronic clearings. The local clearing system is monitored by the Macau Monetary Authority and a cheque takes two days to clear.
There is no settlement of the two major currencies in circulation in Macau, namely MOP and HKD, through the clearing system on Saturdays and Sundays. Most banks do offer in-house electronic payments services, replicating RTGS and ACH services, where both the payer and the beneficiary hold accounts with that bank.
Cash Management Services
With the exception of three offshore banks, all the banks in Macau are retail banks with full banking licences. The banking regulations in Macau are relatively benign in comparison to other Asia-Pacific countries.
Account services
Figure 1 illustrates the types of accounts that can be opened together with the regulation for the payment of credit interest on such accounts.
Figure 1: Local Regulations for Account Holding in Macau
| Account type | Local current | Local savings | Foreign current | Foreign savings |
|---|---|---|---|---|
| Resident | Yes | Yes | Yes | Yes |
| Non-resident | Yes | Yes | Yes | Yes |
| Credit interest | No | Yes | No | Yes |
Source: HSBC, Macau
Liquidity management services
The regulations governing liquidity management techniques can be summarised as follows:
- MOP, HKD and foreign currency in-country notional pooling is permitted subject to validation of enforceability right of set-off.
- MOP, HKD and foreign currency in-country sweeping, or cash concentration, is permitted.
- Neither MOP cross-border notional pooling nor MOP cross-border sweeping are permitted.
- Foreign currency cross-border sweeping is permitted.
Payments and collections
In the absence of electronic ACH and RTGS clearings, most institutions use the in-house ACH facilities of major banks, including standing instructions and direct debits. Where this is not possible (for example, if the counter-party maintains an account with a different bank), cheques are commonly used, denominated in MOP or HKD, though SWIFT is used by banks as a standard payment method.
Commercial Activities in Macau
In recent years, Macau has sought to promote the following key activities to diversify from the leisure industry base.
Foreign trade centre
As a free port and an active foreign trade centre, Macau has a robust transportation system. Since 1990, with the opening of the container port, international airport and new border facilities, Macau has well established land, sea and air transport infrastructures. With the development of information technology, the traditional transportation industry has evolved into an integrated logistics industry.
Logistics centre
In 2001, construction began on the Macau Logistics Centre, located near the international airport. The strengthening of Macau’s transportation system and ever-closer regional economic co-operation, means the Macau logistics industry has scope for further development.
Back offices
Macau is positioning itself as an attractive place to set up back offices. The territory’s features include: free port status; strategic geographic location in relation to Greater China for developing business ties, particularly with mainland China; a reliable telecommunications network; well-qualified human resources professionals; and low operational costs (office rentals, salaries). Offshore back office companies in the territory can enjoy various tax exemptions.
Key factors for the establishment of back offices in Macau are:
Offshore business
The Macau SAR government is committed to modernising the legal framework for the development of offshore business, both financial and non-financial. This is regulated by the Macau Monetary Authority, while the regulation and supervision of offshore non-financial business is the responsibility of the Macau Trade and Investment Promotion Institute. In the last two years, the number of offshore business applications has shown a significant increase.
The offshore institution is exempted from a number of taxes such as income tax, industrial tax and stamp duties. In addition, the offshore institution’s managers and professionals (non-Macau residents) are exempted from salary tax for the first three years of their employment. The range of activities for offshore financial businesses includes banks, insurers and underwriters and offshore trust managers.
Taxation
The following is a list of the key areas of taxation affecting companies with operations in the SAR:
- Property tax – 16% of rental income.
- Industrial tax – a fixed fee of MOP300 on each business activity.
- Complementary (profits) tax – 12% on profits over MOP300,000.
- Professional tax – between 7% and 12% charged on the individual annual income.
- Stamp duty – 3% on transfer of real estate.
- Social security contributions – the monthly contribution made by the employer is MOP30 per resident employee and MOP45 per non-resident employee.
Looking Ahead
Macau is keen to develop its profile and is therefore active in promoting itself in a number of different industries and cultural groups:
- Pharmaceuticals – some mainland pharmaceutical factories have already set up production lines or confirmed their investment projects in the territory.
- Meetings, Incentive tours, Conventions and Exhibitions (MICE) – a sector of the tourism industry. As part of the modern tourism economy, these sectors offer a natural complement to the gambling industry and affiliated activities already established in the SAR.
- Portuguese factor – as a member of an international group of Portuguese-speaking countries including Angola, Brazil, Cape Verde, Guinea-Bissau, Mozambique, Portugal, Sao Tome and Principe and East Timor, Macau is well placed to foster ties between other nations in this group as well as between mainland China and the European Union through its European associations.
- China connection – although small in size, Macau is externally orientated, playing a key role in the regional economy, as a bridge linking mainland China with international markets. Under the general principle of ‘one country, two systems’, the SAR government, with the assistance of relevant organisations, is strengthening exchanges between Macau and cities and provinces of mainland China by acting as an economic and trade intermediary.
Conclusion
Macau’s mini economy, and its development, are inevitably restrained by factors such as resources, market size and economic structure.
Further development of infrastructure projects and communication networks in conjunction with Hong Kong and the Pearl River Delta region would facilitate long-term investment in Macau.
Macau’s free port status needs to be strengthened to allow the SAR to fully exploit its role as a gateway not only between China and the international community but also between China and Taiwan. The strengthening of economic and financial ties between the mainland and Taiwan would encourage Taiwanese investment in the SAR as a means for those investors to access mainland China.