CHINA

The Economics of Tobacco – in brief

Consumption

Ministry of Health's statistics suggest that China has about 300 million smokers, or 35
percent of the population above the age of 15 years. As the graph below shows, there
was a dramatic increase in smoking especially during the 1970s and 1980s.

Despite anti-smoking campaigns, the number of cigarettes smoked by the average

Chinese smoker increased from 10 per day in 1992 to 14 in 1996.

Cigarette Sales in China

1952-1998
100000
80000
million packs of 20

60000
cigarettes

40000
20000
0
1952

1972

1980

1992
1956

1960

1964

1968

1976

1984

1988

1996
S ource: China S tatistical Y ear Book 1993, 1998, US DA , China
Tobacco Report 1999

Towards the end of the 1980s, the real price of cigarettes began to rise, and per capita
consumption levelled off and began to decline slightly.
 Cigarette consumption (1952-98), retail nominal and real
price of cigarettes in China, 1952-1992
1.60 80

1.40 70

Per capita consumption/pack

P e r ca pita consum ption/pa ck
Average price/pack 1.20 60

1.00 Ave ra ge re ta il price /pa ck 50

0.80 40
Re a l Ave ra ge re ta il price /pa ck
0.60 30

0.40 20

0.20 10

0.00 0
1952
1954
1956
1958
1960
1962
1964

1968
1970
1972
1974
1976
1978

1982
1984
1986
1988

1992
1994

1998
1966

1980

1990

1996
Source: China trade price statistics 1989, China Statistical year book 1993-1998
Production

A small decline in the land area planted with tobacco is expected to continue, going from
1.3 million hectares in 1999 to 1.265 million hectares in 2000 (a 3% decrease) as the
government continues its campaign to reduce production volume while improving
quality.

High quality production is geographically concentrated with Yunnan province accounting

for 53% of all high-grade tobacco, followed by Henan (12%), Guizhou (11%) and Fujian
(6%). [Q – graph does not show Fuijan?]

Major raw tobacco producing regions

in 1992 and 2000
900
800
1992
700
1000 tn.

600
500
400 2000
300
200
100
Heilongjiang

Shandong

0 Guizhou

Yunnan
Shaanxi

Sichuan
Hunan

Henan
Hubei

❋ Over the past year (1998) the Chinese tobacco industry made efforts to become more efficient in
the face of foreign competition and government imposed downsizing.
1. In Yunnan, the Kunming cigarette factory has entered into an agreement with Standard
Commercial to build a modern leaf-processing facility.
2. Japan Tobacco entered into a joint venture with Shanghai Gaoyang Tobacco to produce 400
million cigarettes per year in Shanghai. The new facility would turn out Mild Seven, and Mild Seven
Lights Brands (most promoted brands in China).
3. Ningbo Cigarettes, now in joint venture with Phillip Morris, reported an 83% increase in profits
last 1998 and forecast another 21% in 1999.
 Major cigarette producing regions in
1992
million packs of 20 14000
cigarettes 12000
10000
8000
6000
4000
2000
0

Guangdong
Jiangsu

Shandong

Yunnan
Zhejiang

Guizhou
Heilongjiang

Guangxi

Hunan
Sichuna

Anjui
Shanghai

Hubei
Jiling

Fujian

Henan
Hebei
Shaanxi
❋ Output levels are being controlled by the STMB in an attempt to reduce stocks and increase
production of higher quality cigarettes.

❋ By 1999, there were 188 cigarette factories nationwide. In 1998, 18 or 19 were closed and over 20
others had their licenses revoked, or were stripped of their corporate status as part of the move to monitor
quality and improve production.

PRICE / TAXES

Leaf Tobacco
❋ Tobacco accounts for 65% of provincial tax revenue in Yunnan in 1999. In April 1999, the State
Council announced that it will lower the agricultural product tax on tobacco from 31% to 20%. Although
this will increase the direct returns to farmers, it will also reduce funds available for local governments to
subsidize tobacco production.

❋ The average purchase price of leaf tobacco in 1999 was $840/MT. Average purchase prices are
not expected to change much during 2000, but STMA does plan to allow prices for top quality to increase
by 5%, while prices for low quality tobacco remain the same or fall, as part of its effort to improve quality.

Leaf Tobacco Purchase Prices ($/MT)

Region 1 Region 2 Region 3 Region 4 Region % % of 1998
procurement
Class A 1590 1548 1420 1309 1231 15%
Class B 970 947 695 814 767 52%
Class C 380 371 320 343 321 33%
Class D 118 118 112 104 98 33%

Class A : Highest quality produced in Yunnan province

Class B: second quality produced in Fujian, Guangdong, Guangxi, Hunan, Jiangxi
Class C: third quality produced in Anhui, Hubei, Shangong, Henan, Guizhou, Sichuan
Class D: fourth quality produced in Shanxi, Inner Mongolia, Liaoning, Shaanxi.

Subsidies
❋ Before 1999, the central government does not provide direct subsidies to tobacco farmers, but
local governments provide substantial assistance.

❋ Extention services provide new seedling, fertilizers and improved curing facilities at no costs to
farmers. Some local governments provide additional subsidies.

❋ For example, in Qiongqing, tobacco farmers receive payments for rebuilding curing facilities.
They can also receive 4kg. Of free agricultural film and fertilizer subsidies of RMB 1200 ($145) per
hectare of land planted.

❋ In parts of Shandong province, tobacco farmers receive up to RMB 1500 per hectare in subsidies.

❋ In 1999, STMA has reformed the system of supports for such inputs as chemical fertilizers and
pesticides. Under the new scheme, supports are fixed at US $125.96/ha., the previous nationwide average.
Local offices are expected to continue providing asistance in preparing seeds, agricultural film, etc.

Cigarette Prices

❋ In mid-1998, the sales tax on cigarettes which is levied on manufacturers was changed from 40
percent on all cigarettes to a system based on grades.
Grades Tax rate in 1998
Low grade cigarettes and 25%
cigars
Middle-grade 40%

High grade 50%

Imported 50%

❋ There are currently four price classes of domestic cigarettes in China.

Class Price Price Per pack Percentage of Sales

Class A Greater than RMB 7,500/5,000pcs RMB30/pack 14.1

($903.61/5,000pcs) $ 3.61/pack

Class B RMB 2,500-7,500/5,000pcs RMB 10-30/pack 13.7

($301.2-$901.6/5,000pcs) $1.20-3.61/pack

Class C RMB1,250-2,500/5,000pcs RMB 5-10/pack 43.3

($150,6-$201.3/5,000 pcs) $0.60-$1.20/pack

Class D Less than RMB 1,240/5,000pcs RMB <5/Pack 28.9

$ <0.60/pack

REVENUE

❋ In 1997, tobacco industry generated RMB90 billion taxes ($10.83 million).

❋ Taxes on tobacco and tobacco products provide the government with its single largest source of
revenue, amounting to RMB95 billion in 1998 (US$ 11.47 million)
Up to 60 percent of the retail value of cigarettes goes back to the government in the form of taxes

Yunnan earns over three-fourths of its total tax revenue from tobacco sales. In 1994 this amounted to 80
percent of the 25 billion yuan GDP.

TRADE

❋ Trade is expected to increase as the activities of joint venture companies help to facilitate both
exports and imports of leaf tobacco.

❋ Exports will also be supported by government policies that provide 13% rebate on the VAT for
leaf tobacco export.

❋ Leaf tobacco exports are forecast to reach 108,000MT in 1999, an increase of 17% over 1998.
This is due in part to a 13% rebate on the 17% VAT that became available to exporters of flue-cured and
burley leaf as of July 1, 1999.

❋ In 1999, China reduced its MNF tariff rates

SMUGGLING

❋ The smuggling of cigarettes began in the early 1980s.

❋ At the early stage, it was only small quantities, but now it has developed into single-large-value
cases, as well as gang-organized, specialized and intelligent crime.

❋ High tariffs have kept China’s cigarette market largely closed to foreign imports and contributed
to significant levels of smuggling. In 1993, tax on imported cigarettes was levied at 125% which was
increased to 400% in 1994. In March 1995, China cut the tariffs on imported cigarettes to 80% and in 1996
to 70%. Tariffs on cigarette filters were lowered from 70% to 40% in 1996.

❋ STMA try to control tobacco supply and production is its campaign against imported and illegally
produced cigarettes.

❋ Illegal production of domestic cigarettes is a growing problem. Counterfeit brands are increasing,
and almost all high quality brands have been counterfeited.
• Counterfeit cigarette manufacturing has been streamlined and has a network that spans
processing, manufacturing, transporting, wholesaling and retail sales
• The techniques of manufacturing counterfeit cigarette have become highly sophisticated
• Some of the technical personnel and equipment have become sources of underground
factories
• Some local governments unfortunately believe that for farmers, especially in poor areas,
making counterfeit is a fast tract to getting rich. Therefore these local governments have not
cracked down on the counterfeiting activities.

❋ In an effort to control the sales of illegally produced domestic cigarettes, the government has
moved to shut down the unlicensed wholesale markets through which the cigarettes are sold, closing some
93 of an estimated 145 such markets. These markets have now been banned in twenty provinces.

❋ STMA recently announced the formation of a dedicated tobacco freight forwarding company,
called the China Tobacco International Freight Forwarding Corporation.

❋
REGULATIONS/RESTRICTIONS

❋ In July 1999 the government announced a ban on tobacco advertisements, though many
companies continue to carry out promotional activities.

Wu Jieping, chairman of the organizing committee for the 10th World Conference on Tobacco and Health
which will meet in Beijing in August 1997, said he hopes that more cities will ban smoking in public places
and that local governments will act to protect passive smokers. The theme for this meeting was said to be
"tobacco, the growing epidemic." Wu, who also is on the Standing Committee of the National People's
Congress, said that the state will launch a nationwide survey on smoking as a reference for mapping out
policies. China is considering a tax increase on cigarettes to fund anti-smoking campaigns and education.
The total elimination of all tobacco ads throughout the country before the year 2000 is a goal of the
committee. Currently, according to the China Daily, in an article dated January 25, 1996, some 26 cities
including Beijing, Shanghai, and Guangzhou have already established laws forbidding smoking in public
places. Some cities like Beijing, Zhuhai, and Zhongshan have already passed municipal laws banning
tobacco ads in public places. China's Advertisement Law, which took effect on February 1, stipulates that
"erecting or placing advertisements for tobacco at public places including waiting room, cinemas and
theaters, conference halls and sport stadiums and are prohibited." The advertisfor radio, film, television,
newspapers, and magazines. Places where ads were permitted were described as follows: "outside the
targeted public places, including street markets, flyovers, and roadsides".

One source printed the following statistic that China had official health loses due to smoking in 1994
valued at 27 billion yuan. In the same year tobacco sales were valued at 24 billion yuan.