Cigarette Sales in China

Transcription

1 CHINA The Economics of Tobacco in brief Consumption Ministry of Health's statistics suggest that China has about 3 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 197s and 198s. Despite anti-smoking campaigns, the number of cigarettes smoked by the average Chinese smoker increased from 1 per day in to 14 in Cigarette Sales in China million packs of 2 cigarettes Source: China Statistical Year Book 1993, 1998, USDA, China Tobacco Report 1999 Towards the end of the 198s, the real price of cigarettes began to rise, and per capita consumption levelled off and began to decline slightly.

2 Cigarette consumption ( ), retail nominal and real price of cigarettes in China, Average price/pack Per capita consumption/pack Average retail price/pack Real Average retail price/pack Per capita consumption/pack Source: China trade price statistics 1989, China Statistical year book

3 Production A small decline in the land area planted with tobacco is expected to continue, going from 1.3 million hectares in 1999 to million hectares in 2 (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?] 1 tn Major raw tobacco producing regions in and 2 Heilongjiang Shandong Shaanxi 2 Hubei Hunan Sichuan Henan Guizhou Yunnan? 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 4 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.

4 million packs of 2 cigarettes Major cigarette producing regions in Jiling Heilongjiang Jiangsu Zhejiang Fujian Shanghai Guangxi Hebei Shaanxi Guangdong Sichuna Guizhou Anjui Hubei Shandong Hunan Henan Yunnan? 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 2 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 In April 1999, the State Council announced that it will lower the agricultural product tax on tobacco from 31% to 2%. 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 $84/MT. Average purchase prices are not expected to change much during 2, but STMA does plan to allow prices for top quality to increase by 5%, while prices for low quality tobacco remain the same or fall, as part of its effort to improve quality. Leaf Tobacco Purchase Prices ($/MT) Region 1 Region 2 Region 3 Region 4 Region % % of 1998 procurement Class A % Class B % Class C % Class D % 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

5 ? 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 12 ($145) per hectare of land planted.? In parts of Shandong province, tobacco farmers receive up to RMB 15 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 4 percent on all cigarettes to a system based on grades. Grades Tax rate in 1998 Low grade cigarettes and 25% cigars Middle-grade 4% High grade 5% Imported 5%? There are currently four price classes of domestic cigarettes in China. Class Price Price Per pack Percentage of Sales Class A Greater than RMB 7,5/5,pcs ($93.61/5,pcs) RMB3/pack $ 3.61/pack 14.1 Class B RMB 2,5-7,5/5,pcs ($31.2-$91.6/5,pcs) RMB 1-3/pack $ /pack 13.7 Class C RMB1,25-2,5/5,pcs ($15,6-$21.3/5, pcs) RMB 5-1/pack $.6-$1.2/pack 43.3 Class D Less than RMB 1,24/5,pcs RMB <5/Pack $ <.6/pack 28.9 REVENUE? In 1997, tobacco industry generated RMB9 billion taxes ($1.83 million).? Taxes on tobacco and tobacco products provide the government with its single largest source of revenue, amounting to RMB95 billion in 1998 (US$ million)

6 Up to 6 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 8 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 18,MT in 1999, an increase of 17% over 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 198s.? 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 4% in In March 1995, China cut the tariffs on imported cigarettes to 8% and in 1996 to 7%. Tariffs on cigarette filters were lowered from 7% to 4% 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.?

7 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 1th 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 2 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.