With the approach of yet another busy season of leaf tobacco harvesting in China, the tobacco monopoly administrative authorities in coordination with state-run tobacco companies are intensifying efforts to crack down on continuing rampant nationwide illegal trade of leaf tobacco.
In China, tobacco is a government monopoly, and Chinese law provides for the system of state monopoly over tobacco trade. Accordingly, the state levies heavy taxes on the tobacco industry. In particular, the leaf tobacco tax earned from major tobacco-growing regions contributes significantly to the financial revenues of local governments.
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But for various reasons, there has always been rampant illegal trade of tobacco in some Chinese regions.
To ensure an orderly leaf tobacco trade in the busy season and to protect the interests of both the state and tobacco growers, the administrative authorities and local tobacco companies are adopting multiple measures to block the illegal trade of leaf tobacco and crack down harshly on any act of illegal trade.
Root causes
Tremendous profits: illegal traders can earn tremendous profits through the illegal trade of leaf tobacco and evasion of taxes. For tobacco growers, it is quite reasonable that they would want to earn as much as possible from their crop. Some tobacco growers who are more active and who have more market accesses are trying to sell leaf tobacco inter-regionally in order to maximize their returns.
According to a notice issued by the National Development and Reform Commission on state leaf tobacco purchase prices and subsidies for the year 2009, leaf tobacco prices in China will go up by an average of 10% in 2009. In reality, state leaf tobacco prices vary greatly from one region to another. For example, the price of the middle standard grade of flue-cured tobacco (X2F) set by the state may be as high as RMB740 (US$106) per 50kg in some regions, but may be as low as RMB610 per 50kg in other regions, creating a big price difference. Therefore, some tobacco growers choose to breach the sales contracts previously signed with local tobacco companies and sell their tobacco inter-regionally instead.
There is demand from illegal markets: in China there are large numbers of underground (illegal) cigarette factories making fake cigarettes. They demand large quantities of leaf tobacco. To ensure supplies, they normally offer higher prices for leaf tobacco, in violation of the law on state tobacco monopoly. As a result it is difficult to wipe out illegal production and marketing of counterfeit cigarettes. Accordingly there exists a vicious circle of "illegal trade of leaf tobacco - production and marketing of counterfeit cigarettes - sales of counterfeit cigarettes back to the source of the leaf tobacco".
In 2008 alone, the administrative authorities cracked 5,505 cases of producing or marketing fake cigarettes nationwide, each involving RMB50,000 or more in street value, seizing 9.28 billion fake cigarettes (928,000 boxes) and 28,000 tons of cut tobacco or leaf tobacco for producing fake cigarettes, all of which were acquired by fake cigarette manufacturers illegally.
Weakness of binding force of tobacco growing contracts: contracts for tobacco growing normally provide that tobacco growers shall grow and sell tobacco in accordance with the contracts signed. But in reality, tobacco growers just plan their tobacco acreage at will, or do not sell all the tobacco grown to state-run leaf tobacco purchase stations. Even if the rate of fulfillment of contracts is zero, the penalty is usually just a simple form of criticism. Only in rare cases is legal action taken against the farmer for breach of contracts. Essentially, tobacco growers will not receive any punishment for breach of contract or selling leaf tobacco illegally, which implies a degree of tolerance perceived to be a form of "legalization" of the illegal leaf tobacco trade.
To ensure stable development of leaf tobacco production and tp prevent loss of control over the total tobacco acreage in China, the State Tobacco Monopoly Administration (STMA) has defined "prevention of overheating in leaf tobacco production" as a major task for the administrative authorities.
So far in 2009, state-run tobacco companies have signed 1.5061 million contracts with tobacco farmers for tobacco growing and sales, down 736,800 year-on-year. The total tobacco acreage in China now stands at 16.85 million mu (1.123 million hectares), down by 445,000 mu, And, the contractual leaf tobacco sales volume to the state by tobacco growers this year is expected to reach 46.85 million dan (2.342 million tons), an anticipated decrease of 990,000 dan from the actual sales volume in 2008.
However, depending on the actual amount of leaf tobacco purchased by the state each year, the tobacco acreage will normally go beyond the contractual sales volume, thus creating ideal conditions for illegal trade. In particular, as a result of the global financial crisis, large numbers of migrant workers have returned to rural areas to do farming. Because of various forms of policy support, most farmers choose to grow tobacco. Meanwhile, in purchasing leaf tobacco from tobacco farmers, state-run leaf tobacco purchase stations will strictly observe the contracts signed, and refuse to purchase any extra leaf tobacco produced in excess of the contracts signed. This contributes to creating yet another condition for illegal trade of leaf tobacco.
Inadequate system of law and government policy: the state has made strict provisions for the grading of leaf tobacco and for the pricing of leaf tobacco in all grades. In the table of prices of flue-cured tobacco issued by the National Development and Reform Commission for 2009, Grades One, Two and Three of leaf tobacco are each divided into more than 10 sublevel grades, with the price difference between any two grades of leaf tobacco varying from RMB10 per 50kg to some RMB100 per 50kg.
Meanwhile, tobacco companies have no legal remedy for disposing of leaf tobacco beyond the grades prescribed. As it is difficult to avoid disputes over leaf tobacco grading between tobacco companies and tobacco growers, some tobacco growers may become resentful. Whenever they feel that tobacco companies are trying to force prices and grades down, they would rather sell their leaf tobacco elsewhere or simply sell it to illegal traders, which creates a serious disruption in the normal order of leaf tobacco trade.
The aforesaid problems to some extent negatively impact the work of state leaf tobacco purchase. In response, the administrative authorities in all Chinese regions have, in light of the experience in leaf tobacco purchase in previous years, taken precautions and adopted multiple measures to actively block the illegal trade of leaf tobacco.
Measures and proposals
In south central China's Hunan province, which is one of the leading tobacco-growing regions, the Jiahe City Tobacco Monopoly Administration has designated personnel to conduct propaganda exercises using special vehicles. Meanwhile, the local television station airs the law and regulations on tobacco monopoly through rolling screens while local tobacco monopoly law enforcement officers go to the street to post slogans aimed at encouraging the prevention of illegal leaf tobacco trade and to develop an atmosphere if antipathy towards illicit sales. The city tobacco monopoly administration also regularly holds symposiums for potential illegal leaf tobacco traders to advise them on the legal ramifications law and to exercise supervision over them, in order that they "will not, dare not or cannot" conduct illegal trade of leaf tobacco.
In southwest China's Yunnan province, which is the largest tobacco-producing region in China, also known as the "Kingdom of Tobacco", Qujing City Tobacco Monopoly Administration has launched a campaign known as "tracking down the origin of illegal trade and controlling the flow of leaf tobacco", to crack down harshly on such unlawful acts as illegal market trading, unauthorized purchase and processing, illegal stockpiling of and unlicensed trafficking in leaf tobacco. Meanwhile, the city tobacco monopoly administration has stepped up efforts to inspect leaf tobacco transportation to and from other Chinese regions. The adoption of such measures has contributed to effectually blocking both the illegal inflow and outflow of leaf tobacco.
In southeast China's Fujian province, Jianning County Tobacco Monopoly Administration focuses its energy on inspecting leaf tobacco transportation in border areas, particularly cracking down on the illegal purchase and trade of leaf tobacco in areas of the county bordering other Chinese regions.
In central China's Hubei province, Lichuan City Tobacco Monopoly Administration cooperates effectively with Shizhu Tobacco Subcompany in southwest China's Chongqing City to jointly maintain the normal order of leaf tobacco trade in border areas between the two regions. Firstly, they manage to balance the standards for grading leaf tobacco in border areas, holding regular bilateral meetings to coordinate the application of standards for leaf tobacco grading and further unify the standards for quality control over the leaf tobacco trade in border areas.
And secondly, they join hands cracking down on the illegal trade of leaf tobacco and jointly establish platforms for market information sharing in order to exchange information regularly and jointly maintain the normal market order.
However, sources with the tobacco industry say that besides propaganda and education and strengthening of supervision and control, it is advisable for STMA to make relevant policies to redress some unfavorable objective factors.
Firstly, the industry believes that it is advisable to adopt a system of flexibly pricing leaf tobacco in accordance with the prices already fixed, to reduce the scope for profit making on low-grade leaf tobacco and to leave no room for profit making by illegal traders.
Secondly, it is advisable to explore ways of retrieving and making use of inferior leaf tobacco, to turn what is useless into something of value.
Thirdly, it is advisable to further strengthen and improve management over contracts, increase the binding legal force of contracts signed between tobacco companies and tobacco farmers and to establish a system of issuing warnings to tobacco farmers who deliberately violate a contract, or even ask them to withdraw from the business of tobacco cultivation altogether.
And fourthly, it is also advisable to establish a system of strict observation of the contracts signed between tobacco companies and tobacco farmers. Where farmers produce leaf tobacco in excess of the amount stipulated by the contract, changes should be made to the contract in a timely manner.
To sum up, prevention of illegal trade of leaf tobacco requires effort to stop illegal trading at the origin and requires the adoption of multiple measures. Only by establishing a harmonious and orderly leaf tobacco purchase environment can Chinese authorities hope to fundamentally increase the willingness of tobacco farmers to voluntarily fulfill the terms of signed contracts. Only when illegal leaf tobacco traders have no room to make profits can all the channels for the illegal trade of leaf tobacco be effectively blocked and the production and marketing of fake cigarettes from the very origin be stopped. Enditem
