Earlier this year, I published a paper asking “Where Have China’s State Monopolies gone?”. Because of the way Chinese industrial survey data doesn’t aggregate enterprises with the same industry group, the paper argued that the conventional measure of industrial concentration, the Herfindahl-Hirschman Index (HHI), would under-estimate the prevalence of monopoly in China’s industrial economy. In the paper, I observed that “the 20th largest (industrial) subsector, the manufacture of cigarettes, has an HHI of 0.041, making it only the 148th most concentrated industry, and yet the entire tobacco industry is unashamedly monopolized by the State Tobacco Monopoly Administration”.
The entire story of China’s tobacco industry, and the role of the state in it from China’s late-Republican period to the present, is the subject of “State-Market Interactions in China’s Reform Era“, by Junmin Wang. This is a tremendous book that combines fieldwork, including 133 interviews, with a sophisticated framework concerning key questions in state ownership.
Tobacco is worthy of a closer look for a few reasons. Firstly, while the Chinese tobacco industry is monopolised by state-owned enterprises (SOEs), these SOEs are not regulated through the State-owned Assets Supervision and Administration Commission (SASAC) that have overseen most industrial SOEs. Since 2003, the “State Tobacco Monopoly Administration” at central and local levels, oversees the enforcement of the state monopoly, the Chinese National Tobacco Industrial Corporation (CNTIC) is in charge of all tobacco enterprises, including cigarette factories, and the China National Tobacco Trade Corproation (CNTTC) oversees domestic and international trade.
After assuming that all central SOEs involved in cigarette manufature are actually part of the same group, I showed that the HHI measure leaps from 0.041 (an unconcentrated market) to 0.842 (almost completely monopolised).
But this book tells a fascinating story of fierce local competition, despite the formal state monopoly. As the author explains, the central state monopoly was formally established in 1984 with the goal of preventing local governments from allowing the tobacco industry to ‘grow out of the plan’. New township and village enterprises (and eventually private enterprise) were allowed to grow outside the state-planning mechanisms when it came to textiles and light manufactures, but to protect the state’s own tobacco revenues, the entire tobacco industry was put under the jurisdiction of a new central bureau. Tobacco would remain as an island of central planning and state-ownership, with quotas assigned by the central authority even as planning was eventually abandoned.
We might expect that old-school central state monopoly and a commitment to central planning would guarantee the ossification of the tobacco industry, despite the surrounding tumult of ‘reform and opening up’ in other sectors.
This isn’t what happened – Wang explains how local governments, left thirsty for fiscal revenue, effectively colluded with local bureau of the central monopoly administration to circumvent the strictures of the plan. Local governments competed amongst each other for market pair, so that while the state part of the “state monopoly” was strictly enforced (there were no private competitors) the monopoly part was difficult. Provinces informally traded quota assignments and sales rights amongst themselves, and one enterprising municipality (Yuxi, in Yunnan province) even combined the monopoly regulator, local cigarette manufacturer, and tobacco trading company into a “one-stop shop”, all under the common leadership of the entrepreneurial manager of the cigaratte factory. The result was the Hongta Tobacco Group which became China’s “tobacco empire”.
In theory state ownership softens the budget constraint and weaken firm performance, in pratice Wang argues that in Yunnan “local governments surrended their direct control to the SOEs and played a supporting role in their economic activities”. While in a formal sense, the company is centrally state-owned subject to a central planning mechanism, Hongta Group, supported by Yunnan province, took on a life of its own far removed from that of the comfortable state monopoly.
Wang also attempts to explain a contradiction between the decentralisation of industry in the 1980s and 1990s, with the center’s drive to create ‘national champions’ that could take on international competitors once China joined the World Trade Organization in 2001. The number of cigarette factories in China dropped from 202 in 1996 to 30 in 2008, after the central government encouraged mergers between provinces. Wang explains this not as an attempt to retreat from decentralisation within the Chinese domestic market (which gives a company like Hongta the chance to rise), but in order to have “internationally competitive, big Chinese corporations” in competition against the existing bohemoths.
Wang stresses the argument that local governments ‘have become “rational” economic agents and market participants‘ in the sense that they can no longer be thought of as merely implementing agencies of the central government. It shows what on paper is central government ownership and state monopoly doesn’t prevent the development of markets in some form.
I’ve done some work on China’s paper industry, and was already familiar with the Hongta brand because of Zhuhai Hongta Renheng Paper Company runs a large paper mill in Guangdong Province. According to the 2015 Almanac of China Paper Industry, the paper mill in Zhuhai started in 1991 as a joint venture between Yunnan Hongta Group and a Singapore company. But today it Zhuhai Hongta today would be classified as a central SOE – since its original shareholdings have been augmented b a new cotnrolling investment from the Shenzhen-Listed Foshan Huaxin Packaging Ltd , itself controlled by the China Paper Corporation, a wholly state-owned subsidiary of central SASAC SOE – China Chengtong Holding Group Copmany.