It seems a plan by British American Tobacco (BAT) to establish a joint venture in China has been derailed at least for now.

In a statement issued last Friday, the world's second largest cigarette maker said it would set up a US$1.5 billion joint venture to produce and sell cigarettes here.

The country's tobacco industry watchdog, the State Tobacco Monopoly Administration (STMA), promptly responded by saying it had not approved any foreign companies to invest in or set up new tobacco factories.

Reportedly, BAT has not given up hope on this gigantic project.

Its eagerness to establish a foothold in China is certainly understandable. Some 1.8 trillion cigarettes are sold in China every year. There are 320 million smokers in this country, with 3 million more added each year. About 60 percent of all male citizens above the age of 15 are smokers.

With the markets in Europe and North America shrinking, China looms as a prime target in the eyes of top tobacco producers.

After China became a member of the World Trade Organization, the nation lowered its average tariff rate on imported tobacco from 65 percent to 25 percent and it is gradually opening up tobacco distribution.

Apparently these steps aren't enough for tobacco producers like BAT.

The output of the planned joint venture is free of the tariff. Targeting the Chinese market, it is described as "a major growth opportunity" by BAT Chief Executive Paul Adams.

But the chances of it becoming reality any time soon appear slim.

The STMA suspended issuing licenses for new tobacco factories in 1993 because the manufacturing capacity has far exceeded demand in China.

The authorities have been trying to shut down or merge small cigarette factories since then, cutting down the total number of tobacco factories from more than 180 to 85.

It is unlikely a giant factory capable of producing 100 billion cigarettes per year and targeting the domestic market will gain approval after the efforts of the past decade.

Except for lowering tariffs and opening up distribution, China's strict State monopoly on tobacco will be maintained, according to its agreement on WTO entry.

Economic consideration aside, the fact that 1 million Chinese die each year as a direct result of smoking is enough to make the authorities think twice before they issue any new licenses to tobacco producers.

(China Daily July 24, 2004)