[SCMP Column] China's tobacco monopoly

January 14, 2019

For my 50th birthday my daughters very creatively gifted me the December 2 1950 edition of the Financial Times. That was the edition published on the day of my birth. Since I had worked for almost two decades for the FT, the gift was a wonderful idea.

Apart from reminding me what a fusty parochial thing the FT was back in 1950, the paper carried a fascinating full-page feature on its centre pages about an exciting new-fangled innovation: the introduction of filter-tipped cigarettes.

I had naively grown up thinking that filters had been introduced in cigarettes as a health measure to reduce the nicotine and tar smokers ingested. But no such thing. These were naïve times where no one had yet discovered the connection between smoking and cancer. In fact, filters were introduced because of tobacco shortages and wartime tobacco rationing.

The FT’s correspondent confidently predicted that this new-fangled fashion would never last, and would be dropped as soon as rationing was lifted – one more example, if any were needed, of our dubious journalistic track record in predicting the future.

I got to thinking about that fusty old article last week, reading here in the SCMP about the plans of China National Tobacco – today by far the world’s largest cigarette maker and an egregious and blatant national monopoly – to IPO its global tobacco leaf procurement subsidiary China Tobacco International in Hong Kong.

The SCMP article reminded me that the tobacco industry – which I rarely think about, and innocently assumed was in steep decline – was in fact in robust good health despite decades of ruinous bad press, and a well-documented story of the industry’s roll as a killing machine.

As a lifetime non-smoker, the logic or appeal of taking leaves, drying them, setting them alight and then inhaling the smoke has always puzzled and bemused me – all the more so since we discovered that the smoke does a very good job of killing you. How is it that even today still a fifth of the world’s adult population smokes cigarettes of one kind or another? How is it that according to the Tobacco Atlas, 99 per cent of adults in Andorra and Albania still smoke – a question for another day perhaps? At least in China it remains a mainly masculine vice.

The China National Tobacco Corporation, sitting on a virtual cigarette monopoly at the heart of the world’s hugest cigarette smoking nation, seems to have glided immune through the global vilification directed at the tobacco industry, and has felt little of the squeeze felt by the rest of the (private sector-dominated) industry – hence its willingness to list its international tobacco-leaf procurement arm in Hong Kong.

The World Health Organisation estimates around 350m Chinese smokers, including over 60 per cent of Chinese men, and around 40 per cent of China’s male doctors (only 1 per cent of China’s female doctors smoke – which suggests that if you want your doctor to outlive you, you would be well-advised to choose a woman doctor).

Along with the rest of the world, and in compliance with WHO guidance, the Chinese government openly acknowledges the harmfulness of smoking, and subscribes to a wide range of policies trying to stop smoking in public places, and to limit tobacco advertising.

But there is a hitch as far as its anti-tobacco position is concerned. China National Tobacco, otherwise called the State Tobacco Monopoly Administration controlled by the Ministry of Industry and Information Technology, operates 130 factories across the country, employs an estimated 17m people, and in 2016 contributed US$160bn in profits and taxes to government coffers – an estimated 11 per cent of government tax revenues.

Aside from a quibble about what cigarette manufacturing has to do with Information Technology, the conflict of interest is obvious, and explains why the cigarette industry is in such robust good health in China at a time when the global business is stagnant or – in most developed economies – in steady unmourned decline.

Today, China grows over 3m tonnes of tobacco, far ahead of India, Brazil, the US and India which according to Euromonitor together account for barely half of China’s production (mainly in Yunnan and Sichuan). It accounts for four out of every 10 cigarettes smoked worldwide. The WHO says about a billion people still smoke worldwide, consuming 5.4 trillion cigarettes a year with a retail value of almost US$700bn. Around 80 per cent of these smokers are in the world’s low- and middle-income countries, and 350m of them are in China.

Despite the national monopoly (foreign brands have been allowed to account for between 2-3 per cent of the national market), China’s smokers can choose from over 900 brands, giving the entirely false impression of variety and choice.

China’s striking leadership in tobacco production and cigarette consumption might be a lesson to the world about the commercial success and driving role of state-owned enterprises and good old national monopolies were it not for the sad and embarrassing status of the tobacco business worldwide – and that it is linked to an estimated 2m lung cancer deaths in the Mainland every year (I keep having to say “estimated” throughout because of the difficulty we have in getting accurate of up-to-date tobacco industry data from within China).

Despite the harm to human health, there is a brash self-confidence in China National Tobacco that after decades of vilification by the western media is wholly absent from Philip Morris, British American Tobacco, Japan Tobacco and Imperial Tobacco, which nowadays keep a low profile even in the mainly-developing countries that nowadays account for most of their growth.

Surely there is an irony that in spite of the current fierce US campaign against the anti-competitive role of China’s state enterprises and national monopolies or oligopolies, not a whimper has been heard against this most-egregious and long-lived of all Chinese state monopolies, nor on the potential to export US tobacco. If anyone truly cared for the health of China’s people, this would be an industry long gone. The fact that instead we see plans for the monopoly to raise international funds on the Hong Kong stock market, speaks cynical volumes.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinoins expressed are entirely his own.

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