Chinese state battles tobacco tax addiction

January 20, 2014 by Cameron Frecklington

Shi works in a nondescript office building in Beijing’s west, the kind of office where bosses strut through corridors with cigarette kindled. He has smoked for 16 years and guesses that he goes through about 15 Baisha cigarettes a day. When asked what it would take to make him give up smoking, Shi provides an unsettling answer: “Lung disease.”

While such dedication to self-harm is likely extreme, the fact remains that China is home to over 300m smokers. Cheng Li, Director of Research at the Brookings Institute’s John L. Thornton China Center, outlines the obvious perils of the current situation in a monograph released in late 2012. Li collates facts that read easily and stun in their scale. He tells of how China produces 40% of the world’s tobacco and consumes one third, of how 73% of the Chinese population is exposed to second hand smoke, and how there are around one million tobacco-related deaths each year in China (12% of total deaths). What is even more terrifying is that this figure is expected to reach two million by 2020.

Over the past decade, annual cigarette production across China has increased by 50%, according to a December 2013 report from Xinhua News, with 2.1 trillion cigarettes produced over the past year ending October. That works out to 1,555 cigarettes for every man, woman, and child in China, or four cigarettes per Chinese citizen for every day of the year. Even a proposed ban on smoking in public places, due to be introduced by the end of this year, is unlikely to dent sales very much.

Numerous obstacles hinder effective tobacco control, the most obvious being the symbiotic relationship between the State Tobacco Monopoly Administration and the China National Tobacco Corporation. The Chinese state controls the STMA which in turn regulates the CNTC, a golden goose of government revenue.

Jeffrey Koplan, vice president for global health at Emory University and principal investigator of the Global Health Institute-China Tobacco Control Partnership, is diplomatic in his criticism of China’s tobacco policies. “It is a significant hurdle because there is an inherent conflict of interest. Having said that, it is not unique in tobacco control history. While tobacco in the U.S. is not a government-owned monopoly, tobacco [there] has always had a disproportionate influence on government because it was a major crop, taxes were an issue, and there was strong control on a local level,” says Koplan.

“In China, the tobacco business, everything from the plants to the harvesting to the making of cigarettes, is largely a government business. It makes it a little harder, but potentially, when the tipping point occurs and China goes from a tobacco-friendly culture to one that is decidedly unfriendly, then having more government input might actually be more helpful.”

Professor Teh-wei Hu, director of the California-based Public Health Institute’s Center for Tobacco Control and former advisor to the Chinese Ministry of Health, is less subtle. “The STMA is the lead coordinator of China’s FCTC (the World Health Organization’s Framework Convention on Tobacco Control, ratified by China in 2005) inter-ministry implementation committee. It has done nothing in terms of holding meetings to implement the FCTC,” says Hu. “The STMA protects its own interests in cigarette sales and revenue.”

The CNTC does not release its financial information with any regularity, lacking the transparency of a public company. Yet in 2010, when the CNTC invested in the Fujian-based Industrial Bank Co. Ltd, the bank made public some eye-opening financial data.

With sales revenue totaling 770.4bn yuan ($122.5bn), the monies generated by the CNTC accounted for 7.2 % of China’s then-GDP at purchasing power parity, a figure just under New Zealand’s GDP and equal to eight times the GDP for northern neighbour Mongolia in 2012.

But it is not simply a case of lost revenue. Those 2.1 trillion cigarettes are not going to manufacture themselves. Li’s report states that in 2009, the tobacco industry in China employed 60m people (although many were retailers stocking other goods), good enough for 4.5% of China’s population at the time. Scaling back a large number of jobs would undoubtedly appear risky to a government that prioritizes social stability.

Koplan, recently awarded the China Friendship Award for his contributions to Chinese society – including founding the Chinese Center for Disease Control and Prevention (CCDC) – believes this must be taken into account when calls for tobacco control intensify. “Once cannot simply decry tobacco. One must also be aware of the millions of people employed, one way or another, through tobacco. How will they get a decent substitute source of livelihood?”

The threat that tobacco poses is not lost on the Chinese leadership. The Twelfth Five-Year Plan (2011-2015) clearly outlines that a “whole-population healthy life-style” approach is needed to combat the rise in non-communicable diseases, maladies that often accompany a more “developed” economic situation. The plan pledged to reduce the smoking rate among people aged 15 and above by 2-3% by 2015.

How they plan to do so when existing tobacco control mechanisms appear to be ineffective at best is another matter.

The December 2013 Xinhua report also mentions China’s recent poor score (2 out of a possible 16) on a WHO public smoking control grading system. This is in line with a 2010 study that scored China’s tobacco control policies against the World Health Organization’s FCTC tobacco control measures and found China wanting, scoring a paltry 37.3 out of 100.

One aspect that is often cited as an area for improvement is China’s exceedingly low excise tax rate for cigarettes. Despite raising the tax rate from 45% to 56% for Class A (more than 7 RMB per pack) and from 30% to 36% for Class B (less than 7 RMB per pack) cigarettes in 2009, the main result of the tax hike was that government revenue increased and the CNTC was forced to absorb the negative difference into their own profits. Not one yuan of price burden was passed along to the consumer.

According to specific country profiles from the WHO’s Report on the Global Tobacco Epidemic for 2013, Australia took in AU$5.85bn in tobacco excise tax revenue in 2012 and spent AU$71m on tobacco control (1.2%) while the U.S. collected $33bn and spent $557m (1.7%) in 2011. In comparison, China pulled in 335bn yuan (US$54bn) in excise tax revenue in 2011 but only spent 20m yuan on tobacco control (0.006 percent).

It is estimated that half of all Chinese smokers smoke brands of cigarettes priced at under 5 RMB per pack (US$0.82).

Professor Hu’s research shows that if the tax burden was passed on to the consumer instead of being absorbed by the CNTC, with each pack of cigarettes increasing in price by one yuan, then the Chinese government’s tax revenue would increase by 129bn RMB ($US21.2bn), consumption would decrease by three billion packs annually, the number of smokers would be reduced by 3.42m, and 1.14m lives would be saved.

And yet, in the face of all the obstacles that tobacco control faces in China, Jeffrey Koplan remains optimistic. “I think that China is in a better position than where Western countries were regarding tobacco at a similar early stage. By that I mean, there is widespread recognition among Chinese leadership, not just the health sector, that this is a non-sustainable phenomenon and that tobacco use undermines the health efforts that people undertake,” says Koplan.

Han, a colleague of Shi’s in that same unremarkable Beijing office building, also smokes Baisha but he thinks he has smoked for 25 years, nine more than Shi. When asked what it would take for him to quit, he says that he is already considering it. When asked why, Han says a reluctance to smoke in public places. “And stern warnings from my wife.”

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