China’s Government is Hooked on Cigarettes

Air pollution is not the only hazardous inhalant abundant in China.  Over the past couple decades, cigarette consumption has fallen sharply in high-income countries and tobacco conglomerates have been forced into newer, larger markets to amend this trend. However, one major cigarette manufacturer in particular is thriving in the East and has become a staple in Chinese communities.

The China National Tobacco Corp (China National) has served China’s smokers on a scale roughly three times that of its next highest competitor, Phillip Morris International.  Although that can be attributed to China National’s successful block on Western competition, it does not downplay the fact that the company serves over half of all Chinese men and 2% of Chinese women, totalling 98% of China’s 300 million smokers annually and one third of the world’s cigarette smokers.

China’s Insistently Growing Tobacco Market

The 1990’s threatened China National’s ability to generate revenue growth and a decline in sales mirrored Western culture initiatives to push consumers away from smoking cigarettes onto other alternatives.  1990 was the first year since 1972 that revenue either declined or levelled off, while 1974-1990 was a period of massive growth.  Sales stagnated until 2000, which marks the industry’s launch of “less harmful, low-tar” cigarettes as well as a second surge in sales growth. Consequently, many became skeptical about these “less harmful” claims and recent studies prove them to be scientifically false.  Which begs the question: how was this marketing campaign approved in the first place?

China’s tobacco industry generates an overwhelmingly large amount of the government’s tax revenue: 7%. It may come as no surprise then that the State Tobacco Monopoly Administration (STMA) and China National share the same headquarters, the same chief executive, the same website, and, for all practical purposes, are the same entity. Not only did STMA fund the low-tar tobacco research, but the organization conducting it was directly affiliated with China National.  Clearly, this affiliation proposes a conflict of interest between government regulators and industry lobbyists.  The Chinese tobacco industry’s political power is so evident that children notice its presence in their education system, where tobacco sponsors and slogans can be found at elementary schools in poor areas.

Half-Hearted Preventative Measures

In 2005, China joined the World Health Organization’s tobacco-control treaty.  Since then, the same institution in charge of tobacco regulations remains in charge selling tobacco: a clear treaty violation.  The Ministry of Health recognizes China’s tobacco consumption as a major health problem, as it kills roughly 100 thousand users per year while the rate of lung cancer is rising rapidly among poorer communities.  Studies prove that an increase in tobacco taxes can drastically reduce the number of tobacco consumers annually (a 10% increase can immediately reduce the number of users by 4%). Interestingly enough, the Chinese government that is directly affiliated with the tobacco industry refuses to raise tobacco product taxes over 40%, while WHO’s best practice is a 75% tax rate.  Although China’s recent twelve-year plan outlines an initiative to reduce consumption based on WHO best practices, regulators are less than excited to express control over the industry due to government dependence on this market.

Remedying the Situation

China’s tobacco industry relies on demand from poorer, uneducated communities.  Many of the same executives, lobbyists, and politicians that defy this industry’s decline are outspoken non-smokers.  Balancing the health of the economy and the health of average citizens is difficult.  However, medical costs on tobacco-related diseases are amounting to $22.7 billion per year, and in 2005, cigarettes generated $32.5 billion in tax revenue while only $31,000 was spent on tobacco control.  At the moment, the most worrying aspect regarding this industry is that China’s income per capita is rising much faster than any tobacco tax rate, causing male children to be 18% more likely to smoke in China than on average in other middle-income countries.  Without any education on the subject, only 25% of Chinese adults have a comprehensive understanding of the specific health hazards of smoking.

At the moment, it’s a reach to say the government should split ties with the industry and China National.  At no point in the near future do experts think this will occur given their deep roots together.  But with the recent smoking ban in specific public places (public transportation and hospitals), China’s “initiatives” may not seem so farfetched after all.  The British Medical Journal published and study that found by 2050, the prevalence of smoking in China would reduce by 40% if regulators followed WHOs best practices.  One of the simplest ways to make sure these health risks do not spiral into a more corrupt and hazardous economy is to start young. Youth education, addiction hotline implementation, direct advertising bans and public smoking limitations are all simpler methods (all of which China does not currently take advantage of) to normalize this unnecessarily growing industry in China before raising taxes or separating monopolies.  Clearly, the war on cigarettes is a David vs Goliath tale between the Ministry of Health and industry lobbyists, but the economy will face more decimating effects than lost tax revenues if the growth rate of cigarette sales continues to skyrocket and an unhealthy lower and middle class continues to develop.

 

Brandon Bujnowski

Tulane MBA Candidate 2016