This year, nearly four decades after China first started opening up and implementing economic reforms in 1978, the Chinese government will at last stop its controls on procurement prices on tobacco leaf.
Even as market reforms swept the countryside under Deng Xiaoping, the government kept its grip on the hugely lucrative tobacco industry. Tobacco companies remained exclusively in state hands. Prices of the leaf were set in order to assure farmers of an income and dissuade them from switching to other cash crops. Local governments wanted to boost tobacco farming, not least because of the taxes it yielded. Centuries-old taxes on every other crop were abolished in 2006, but not those on tobacco. The southern province of Yunnan derives nearly 80% of local revenue from the crop. The cigarette industry stuffs the central government’s coffers too, accounting for over 7% of its revenues.
Soaring demand for tobacco products has helped to keep the system afloat. China’s five million tobacco farmers now produce more than three million tons of tobacco per year, 43% of the world’s total — more than the combined output of the next nine tobacco-producing countries. Thanks to low sales taxes, cigarettes have become more than twice as affordable since 1990.
But even in the tobacco industry, command economies have their weaknesses. Yields per hectare have increased slower than for other crops, partly because government incentives have unintentionally spurred tobacco-growing on land unsuited to the leaf. Because sales are assured and prices set, farmers started producing too much low-quality tobacco. Though Chinese leaves are on average cheaper per kilogram than American and Brazilian varieties, they are also inferior.
In theory, abandoning price controls should encourage large-scale farming and help improve quality, but it will be hard for tobacco to find a market price because there is still only one legitimate buyer: the China National Tobacco Company. Prices will remain distorted by production quotas and the tax on crop sales. (The leaf accounts for only a small proportion of the price of a cigarette, so smokers will notice little difference.) Ultimately, tobacco will not find its real price until the government butts out of the market.