Hong Kong Has the Whip Hand in Any Horse Race With Hainan

(Bloomberg Gadfly) -- Hong Kong's government can breathe a small sigh of relief: Its gambling well isn't going to dry up just yet.

Chinese President Xi Jinping handed a long-awaited gift to Hainan province by announcing support for the development of horse racing and sports lotteries on the tropical island, according to a weekend statement by the Xinhua News Agency. That's a potential threat to the Hong Kong Jockey Club, which generated HK$33.9 billion ($4.3 billion) of revenue in the year through June and has been called an ATM for the government for its tax and charitable contributions.

Hold on, though. This is a race that's heavily handicapped in Hong Kong's favor. Hainan faces a host of obstacles before it gets to the starting gate, and even if it does, there's no guarantee the island can meaningfully challenge the former British colony.

For one thing, China has already experimented with horse racing elsewhere, with little success. That may have something to do with the fact that betting is banned, and it isn't yet clear how and whether the prohibition will be relaxed for Hainan. There are racetracks across the country, including in Inner Mongolia. Guangzhou opened a course in 1992, but it was closed within seven years after authorities found evidence of large-scale gambling, the South China Morning Post reported.

Moreover, the Hong Kong Jockey Club's experience, track record and infrastructure will be hard to beat. It has two racecourses with more than 100 off-track betting outlets, offers wagers on soccer matches and also runs a lottery. In recent years, the club has allowed "commingling" or betting from overseas, with Britons now able to wager on Hong Kong races through Ladbrokes Coral Group Plc.

Starting a horse racing industry isn't a matter of just building a track: It requires an entire ecosystem. Besides the horses, which alone can be a huge expense for a competitive operation, Hainan will need to attract trainers, jockeys, veterinarians and other experts. Founded in 1884, the Hong Kong Jockey Club has an accumulation of experience that won't be easy to replicate.

Granted, Macau's gambling operators are in an even stronger position to fend off any encroachment from Hainan. They at least can count on the Communist Party's antipathy to casinos located within mainland China. The experience of Japan and Singapore shows that the process of creating a casino hub is a multi-year affair, as Morgan Stanley analyst Praveen Choudhary notes.

At some point, Hainan will allow a form of betting on horse racing and football: Beijing's aim, after all, is to bring money Chinese consumers are spending abroad back home. It sees the island as a vehicle for that goal. Xi's package for Hainan included not just allowing racing and sports lotteries but also duty-free shopping.

Ultimately, Hong Kong may find itself challenged, especially once the city is subsumed within the Greater Bay Area envisioned by China's central planners. The Jockey Club may then have to find a way of becoming part of the mainland's gambling story, for example by seeking to be the operator of China's horse races and lotteries.

The city still has plenty of time to close the stable door before that horse bolts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2018 Bloomberg L.P.

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