[Intl-tobacco] China Keeps Firm Grip on Tobacco Industry

[Robert Weissman]

Money-spinning habit - The Standard
Beijing keeps a firm grip on the lucrative tobacco industry - one of the
last strongholds of socialism
April 7, 2004

Wu Zhong

Smoking may be hazardous to health, but the tobacco industry is just too
important for the Chinese government to give up the habit. Indeed, tobacco
on the mainland remains one of a handful of industries still under state
monopoly, despite the fact that most economic sectors have been, or are
being, privatised in the market-oriented economic reforms launched 25 years
ago. In this sense, tobacco can be called one of the last ``strongholds'
of socialism.

There are good reasons. Each year, the sector contributes 10 per cent to the
country's state finances. Last year, revenues totalled 2.169 trillion yuan
(HK$2.04 trillion), Minister of Finance Jin Renqing told the annual session
of the National People's Congress early last month. That means the tobacco
industry contributed about 210 billion yuan. In fact, tobacco is the
largest industry in China in terms of state revenue contribution.

According to government statistics about 120 cigarette companies have
half a
million employees. At first glance this is not very big compared with
industries such as petrochemicals or steel. However, in reality, a lot more
people make their living off tobacco, including more than six million
tobacco farmers and three million cigarette retailers.

The world's largest population of smokers - and one that is still
growing -
ensures that the industry will continue to boom. According to a sampling
survey, China now has more than 320 million smokers, of whom more than five
million are primary and secondary school pupils under the age 18. They
consume 1.7 trillion cigarettes each year.

This is despite the government's attempts in recent years to discourage
smoking such as demanding warnings be printed on cigarette packets. And
tobacco firms are still banned from selling shares in the stock market.
Beijing is now also said to be mulling a ban on cigarette advertising and
sales promotion. Social and public health concerns aside, the government is
reluctant to break the state tobacco monopoly given its profitability and
its huge contribution to state finances.

Because of this, Beijing made very limited concessions in opening up the
industry upon its accession to the World Trade Organisation (WTO),
though it
agreed to gradually ease restrictions against foreign cigarettes. China
formally became a WTO member in January 2002, then slashed tariffs on
cigarette imports from 65 per cent to 25 per cent beginning from this year.
At the same time, it also broke the state monopoly on retail sales by
allowing vendors to sell local and foreign brands under one licence.
Previously, only selective shops were authorised to sell foreign cigarettes.

However, Beijing still firmly refuses to open the tobacco industry to
foreign competition. Foreign investment in production, retailing and
distribution of cigarettes is barred. Nevertheless, the tariff cut and eased
retail restrictions have made foreign cigarettes more available in the
market and put mainland tobacco companies under pressure. For example,
Guangdong imported 17.48 million foreign cigarettes in the first two months
of this year, a sharp increase of 270 per cent from a year before. The
imports were worth US$330,000 (HK$2.57 million), up 140 per cent year on
year, according to Customs figures.

Although the period is too short to tell how successful foreign tobacco is
against domestic brands, many feel mainland tobacco is beginning to feel the
burn. Industry insiders generally expect the industry to face a deep
restructuring in the face of the foreign invasion. A major problem is that
among the 120 cigarette manufacturers, too many small and medium-sized firms
are producing too many brands. Liu Jinru, chief of the Legal Department
under the State Tobacco Monopoly Bureau, said the industry must consolidate
through merger and acquisition.

To strengthen their competitiveness, large groups will be formed, he said,
with many brands to be eliminated. This consolidation has already begun in
Guangdong. Last Thursday, the new Guangzhou No 2 Cigarette Factory, a merger
of three tobacco factories, formally kicked off business operations. The
merger leaves four tobacco companies in Guangdong, based in four cities -
Guangzhou, Shaoguan, Meizhou and Zhanjiang. The provincial government plans
a further restructuring, closing the Shaoguan Cigarette Factory in the first
half of this year. The remaining three are to be merged into a single
company in two years' time.

In the meantime, China will continue its protective measures to safeguard
its state monopoly. "Before Chinese tobacco firms become strong enough,
foreign firms will hardly find a chance to enter China,' an official with
the State Tobacco Monopoly Bureau said. And, despite the tariff cut for
tobacco imports, China is still setting a quota to limit imports of foreign
brands. ``Under such circumstances, the total amount of foreign brand
imports can hardly have explosive growth,' the official added.

- Wu Zhong is China business editor of The Standard

http://www.thestandard.com.hk/[...]rd%5Ccolumn_detail_f
rame_col.cfm?colid=7&articleid&9