Jan. 14 (Bloomberg) -- Skeptics are waiting for Chinese President Xi Jinping to prove he’s serious about economic reform -- perhaps by shuttering one of the country’s big, loss-making state enterprises. In fact, if Xi really wants to transform China, the place to start is by reining in one of its most powerful and profitable firms.
China National Tobacco Corp. is a state monopoly, as well as the largest producer of cigarettes in the world: 2.375 trillion in 2010, more than 40 percent of the global total. In 2011, the company funneled $118 billion in profits and taxes into state coffers, a little more than 7 percent of government revenue. In some tobacco-growing areas such as Yunnan, more than half of provincial revenue derives from tobacco. In all, some 60 million Chinese earn their living through farming tobacco, and manufacturing and selling cigarettes.
Of course, CNTC’s products also kill 1 million Chinese every year -- a number that is expected to double by 2020. Since the mid-1980s, China has added 100 million more smokers to the world total. At this point, the number of Chinese smokers -- more than 300 million -- equals the entire U.S. population. In the past 30 years, lung cancer rates in China have shot up 465 percent. By 2030, 1 in 3 middle-age Chinese men could die from tobacco-related causes.
The best way to get people to quit smoking is to raise the price of cigarettes -- which are as low as 75 cents a pack in China -- through higher taxes. But CNTC has resisted this, warning it would cost billions of dollars in declining sales and bring job losses, perhaps even civil unrest if poorer workers could no longer afford cigarettes. In truth, new taxes would generate far more revenue than would be lost in sales, and job losses would be minimal, study after study has shown. (Several of these studies have been funded by the Bloomberg Initiative to Reduce Tobacco Use, part of Bloomberg Philanthropies.)
CNTC has extraordinary power to block new cigarette taxes. It dominates China’s State Tobacco Monopoly Administration -- the body that’s also charged with regulating tobacco use. (Chinese Premier Li Keqiang’s brother is a deputy administrator of STMA.) The company has doled out hundreds of millions of dollars to build roads and facilities to buy goodwill in various provinces. CNTC successfully neutered a 2009 tax increase, so that consumers never ended up paying higher prices, and has also blocked graphic warnings on cigarette packs.
Xi would have much to gain by taming the company. It would reinforce the image he’s trying to cultivate as a leader who’s willing to risk short-term pain for China’s long-term gain -- whether that means squeezing the shadow banking industry, clamping down on official corruption or cleaning up the environment. And a mere 1 yuan tax on a pack of cigarettes would produce almost $8 billion in additional revenue, not to mention the savings in medical costs and productivity. More important, it would save an estimated 3.4 million lives.
As part of reforms announced after last November’s Communist Party plenum, officials are already looking at reforming the Chinese tax code; it would be easy enough to work new cigarette taxes into whatever plan emerges. Tobacco regulation could also be moved out from under CNTC’s influence. In December, the Central Party School laid out a blueprint for having one of China’s health departments take over the job.
Xi, whose wife is China’s most high-profile anti-smoking advocate, has already issued one encouraging decree: barring officials from smoking in public places or at official functions, and from giving cigarettes as gifts. There’s hope that a nationwide smoking ban could be instituted this year.
Ultimately, though, such measures are “flies,” to use a term Xi has employed in his fight against corruption. CNTC is a “tiger.” By restricting the company’s role to the business of cigarettes while instituting higher cigarette taxes and more graphic warning labels, Xi would reduce one of the single greatest threats to the well-being of the Chinese people. It’s hard to think of a better way for China’s leader to prove his will to change his nation for the better.
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