The Coming Week in Asia: Macau Reverts to Chinese Rule

While the dice will continue to roll in Macau, in Tokyo this week, the bets are on the telecom industry.
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TOKYO -- The best party in Asia this weekend will be in Macau, the Portuguese colony that is reverting to Chinese rule after 450 years of European control.

While the handover hasn't generated as much fanfare as the return of Hong Kong did in 1997, it's still shaping up to be a gas. The Portuguese are spending about $35 million -- about $80,000 for each year they ruled the territory -- on the ceremonies, which culminate with a midnight changeover of flags on Sunday. Corks will pop, the casinos will fill and everyone will wait until Monday to worry about how Macau will work under China.

Nestled across the bay from Hong Kong, the territory will become the latest test of "one country, two systems," the clunky arrangement China introduced to govern Hong Kong, Asia's most unfettered bastion of capitalism. How it will play out with Macau's 500,000 citizens, who depend on casinos and tourists for their livelihoods, remains as unclear as the polluted waters that lap against the shores of the region's port.

Macau's economy is dictated by the performance of

Sociedade de Turismo e Diversoes de Macau

, more commonly referred to by the less tongue-twisting acronym STDM. It is the sole operator of Macau's casinos. The power of STDM is enormous: It generated nearly 57% of Macau's total tax revenue in 1998, handing $625 million (5 billion patacas) to the government.

That power won't last much longer. The gambling monopoly will be dissolved sometime in 2001 and more than 50 foreign casino operators from the U.S., Europe and Asia are already rolling the dice on becoming the next highflier in the market. In addition to the casino tourist trade, Macau plays host to the huge underground Chinese betting market, estimated to generate almost $300 billion per year.

The foreign invasion may be an easier task for Macau's incoming chief executive, Edmund Ho, than fighting the region's notorious organized crime gangs. Violence has plagued Macau's old world-styled streets and some worry that if the crime doesn't abate, law and order-oriented Beijing may lose its patience. Laws could get changed, the police could be sent in (even before the handover of Hong Kong, Beijing dispatched a small regiment to the island) and foreign investors will grow leery of the rules changing in the middle of the game.

If that happens, all bets are off.

In Tokyo, consolidation of the telecom industry seems to be the prominent investment bet. On Thursday,

KDD

,

DDI

and

IDO

announced a $26.2 billion merger that they hope will let them challenge

Nippon Telegraph and Telephone

(NTT)

, which dominates the industry, and

Japan Telecom

, which benefits from the foreign expertise of giants

AT&T

(T) - Get Report

and

British Telecommunications

(BTY)

. The three companies, of course, hope they will benefit from rising demand for telecommunications services, particularly wireless phones, as the Internet surges to popularity on the archipelago.

"In an environment where share prices of some Internet firms increase 10-fold, there is no reason why telecom shares can't double or triple through the first half of next year as competition increases," says Takayuki Tsutsumi, deputy analyst at

Tokyo Securities

. Sure enough, DDI shares rose 4.3% to 1.46 million yen; KDD jumped 1.67% to 11,590 yen and

Toyota Motor

(TM) - Get Report

, IDO's parent, leaped by 9% to 4,220 yen after the announcement.

The firms said the merger came about when the

Ministry of Posts and Telecommunications

decided to hand out only three licenses for next-generation mobile phone services when the permits are awarded next spring.

Looks like they're gambling on getting one.

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