(By Caixin journalists Huang Yanhao, Yu Ning and Han Wei)
China’s state tobacco monopoly, which supplies the world’s largest cigarette market and one in every three smokers globally, is engulfed in an anti-corruption sweep that has also snared regulators responsible for overseeing it.
Nearly 20 senior executives and officials from the government-controlled China National Tobacco Corporation (China Tobacco) and the regulator, State Tobacco Monopoly Administration (STMA), have been caught up in the anti-graft investigation since 2021.
A tightly controlled industry
One of the latest targets, Zhu Jianhua, a former general manager of China Tobacco Anhui Industrial Co. Ltd., the Anhui provincial subsidiary of China Tobacco, hung himself to death at home in February after being summoned by authorities, according to several people close to the matter.
Zhu, who retired almost eight years ago, was questioned about matters related to He Zehua, a retired deputy chief of STMA, and a former head of China Tobacco Anhui, sources said. He Zehua came under investigation in January by the Central Commission for Discipline Inspection (CCDI), the country’s top anti-corruption enforcer.
In the month that followed, at least four other individuals at STMA and China Tobacco units in Anhui and Yunnan provinces were swept up in the crackdown.
The investigations have exposed how interests and power are traded in the tightly controlled industry.
The business has long been a controversial corner of China’s economy because of the state-sanctioned monopoly and its blurred boundary with industry regulators. STMA shares offices and personnel with China Tobacco at their headquarters in Beijing and employs a network of officials at local subsidiaries who oversee cigarette production and sales nationwide.
The country is home to more than 300 million smokers and China Tobacco controls 97% of the market. The company, which doesn’t report sales, posted total taxable profit last year of 1.44 trillion RMB (US$204 billion), close to the size of Greece’s economy, according to the National Bureau of Statistics.
From packaging to ingredient supply and logistics, lucrative business opportunities lay in every step of production and sales for companies that can break into the tightly controlled market.
The tobacco flavouring business
The huge profits and vertical management structure make the tobacco industry a breeding ground for corruption. From packaging to ingredient supply and logistics, lucrative business opportunities lay in every step of production and sales for companies that can break into the tightly controlled market.
One of the most successful examples is Huabao International Holdings Ltd., a Hong Kong-listed tobacco flavour maker. Founded by businesswoman Chu Lam Yiu in 1996, Huabao runs China’s largest tobacco flavouring business and supplies China Tobacco’s plants in 19 provinces. In 2021, Chu, dubbed China’s fragrance queen, ranked 99th among China’s richest people by Forbes with a net worth of 37.4 billion RMB.
Since January 2022, Chu has been the subject of investigation by police in Hunan, Jiangxi and Chongqing, and placed under “residential surveillance”, according to the company filings. At the same time, several top executives from China Tobacco’s subsidiaries in Hunan, Jiangxi and Chongqing, where Huabao has a large business presence, have also been investigated.
Huabao has maintained strong ties with China Tobacco for almost two decades, supplying flavours for cigarette production. Manufacturers use flavouring and fragrances to maintain a consistent product, which otherwise would vary in taste and aroma based on the quality of tobacco leaf.
“Flavourings and fragrances are essential raw materials in cigarette production,” an industry source said. “Once a cigarette’s variety and brand are established, the supply of flavours usually remains unchanged for decades. For flavour suppliers, once you break into the market, you can participate in the distribution of benefits within the monopolised industry.”
Zhang Tiandong, product technology chief of Hongyunhonghe Tobacco Group, a unit of China Tobacco in Yunnan province, was charged in 2019 for taking bribes of more than 2 million RMB from a Huabao subsidiary...
Huabao had a revenue in 2022 of 1.44 billion RMB, 76% of which came from its edible flavours business, consisting primarily of product sold to China Tobacco subsidiaries. A prospectus for Huabao’s 2017 IPO indicated that over 80% of its sales since 2014 were attributed to China Tobacco.
Chu entered the tobacco flavours business in 1996 and has since worked with several China Tobacco subsidiaries to form joint ventures to supply China Tobacco’s plants. The partnerships have boosted Huabao’s growth into China’s largest producer of tobacco flavours.
Huabao has been part of several graft investigations in the tobacco industry over the past few years. Zhang Tiandong, product technology chief of Hongyunhonghe Tobacco Group, a unit of China Tobacco in Yunnan province, was charged in 2019 for taking bribes of more than 2 million RMB from a Huabao subsidiary, according to court documents.
In 2018, Feng Bin, a senior official at China Tobacco Yunnan, came under investigation and was accused of taking bribes from a Chu Lam Yiu and a Huabao subsidiary, court records show.
Shockwaves in Yunnan
Yunnan in southwest China, the country’s biggest province for tobacco farming and cigarette production, is a focal point for corruption investigations.
“We have been repeatedly inspected over the past two years and many suppliers have been scrutinised,” said an official at China Tobacco’s Yunnan unit. “The recent round [of inspection] is said to be triggered by the probe of Chu Lam Yiu.”
Since 2021, three former heads of China Tobacco Yunnan have come under investigation, including former chair Ye Libin, former general manager Zhang Shuichang and deputy Gu Bo.
On 24 January 2022, the same day Huabao announced the investigation of Chu Lam Yiu, the CCDI revealed that Zhou Tao, the general manager of China Tobacco Yunnan, had surrendered himself as part of a probe. Zhou, who headed China Tobacco Yunnan since late 2018, had previously held senior positions in various units of China Tobacco in Jiangsu and Guangxi.
In November, criminal charges for accepting bribes were filed against Zhou, who pleaded guilty during a hearing in late April. Sentencing has not been announced.
The probe that started in late 2021 on Yao Qingyan, former Communist Party chief and general manager of China Tobacco's Jiangxi branch, is also believed to be related to Yao's decades-long career in Yunnan.
The richest brothers in Yunnan, Li Xiaoming and Li Xiaohua, have also become involved in the tobacco industry crackdown. The Li brothers control Yunnan Energy New Material Co. Ltd., a supplier of film and paper packaging products.
Yao, 65, started his career in the Yuxi Tobacco Plant in Yunnan. In 1995, the facility was restructured into Hongta Tobacco Group, China’s largest cigarette maker and producer of Yuzi, one of the nation’s most popular brands. The manufacturer is owned by China Tobacco Yunnan. In 2002, Yao was promoted to president of Hongta. Three years later, he became a deputy general manager of China Tobacco Yunnan.
Former colleagues described Yao as a capable and hardworking manager. He is also known as an expert in tobacco formulation technology.
Yao, who maintained close relationships with the business circle, had previously been investigated by the party for allegedly receiving a car as a gift from a businessman, according to a former Hongta executive. The investigation did not result in any penalties, the person said.
“I was initially surprised” by news of the investigation of Yao, the former executive said. “But upon reflecting on his friends, it doesn't seem as surprising.”
The richest brothers in Yunnan, Li Xiaoming and Li Xiaohua, have also become involved in the tobacco industry crackdown. The Li brothers control Yunnan Energy New Material Co. Ltd., a supplier of film and paper packaging products. The company is the world’s largest supplier of lithium-ion battery separator film.
In November, Yunnan Energy New Material said its chair, Li Xiaoming, and general manager, Li Xiaohua, were placed under home arrest by the public security department, without providing details. The brothers were released by early April and returned to their duties, according to the company.
Caixin learned that the investigation on the Lis was likely related to their involvement in the tobacco business.
Yunnan Energy New Material is a key supplier of cigarette packaging products for China Tobacco’s operations in Yunnan, Sichuan and Chongqing.
Cigarette packaging and printing, along with the flavouring and fragrances business, are prone to murky deals, according to the senior official at China Tobacco Yunnan. “These two areas are where the industry has the room to manipulate and trade interests,” the official said.
The graft investigations also rattled the tobacco industry in Anhui and Jiangsu, bringing to light an expansive web of corruption surrounding He Zehua, a deputy head of STMA between 2003 and 2014.
He, an influential figure in China’s tobacco industry, left deep footprints in Anhui and Jiangsu provinces in eastern China. “Many executives in Anhui’s tobacco industry were promoted by He Zehua,” an industry source said. “He spent five years in Anhui, and after 20 years of leaving, He’s influence remains.”
He’s tobacco career began in the Huaiyin Cigarette Factory, a loss-making plant in Jiangsu province. In 1991, He, then deputy governor of Huaiyin county, was named head of the cigarette factory and tasked with turning the business around.
During He’s tenure, the Huaiyin Cigarette Factory’s business improved significantly, thanks to reforms promoted by He and industrywide policy changes. In 1995, He was promoted to deputy director of the Jiangsu branch of the regulator, STMA.
He was succeeded in the Huaiyin Cigarette Factory by Jiang Hongxi, who took the helm for almost a decade. In September 2022, Jiang was placed under investigation by CCDI after five years of retirement.
In 1999, He was transferred to neighbouring Anhui province to head the provincial STMA. “He was bold and capable,” a former tobacco industry official in Anhui told Caixin. “During his time in the Anhui tobacco industry, everyone greatly admired him.”
On 6 January, the CCDI unveiled the investigation of He [Zehua], almost nine years after his retirement as deputy head of the STMA. Weeks later, He’s former subordinate in China Tobacco’s Anhui branch, Zhu Jianhua, died by suicide.
Under He’s oversight, Anhui’s tobacco industry grew rapidly and built up a nationally famous brand Huangshan.
There were also controversies. One was the construction of a sprawling compound of luxury villas by China Tobacco Anhui during He’s tenure. The project, built between 2001 and 2008, consists of 243 upscale villas, according to media reports. The project was proposed as a training center for China Tobacco Anhui and most of the land was used to build luxury residences, a person close to the company said.
It is unclear whether He owns any property in the compound.
Business registration records show that the builder of the compound was a company called Anhui Wanfang Industrial Co. Ltd., which was set up by seven managers in Anhui’s tobacco industry, including Jiang Yawei, a close subordinate of He.
On 6 January, the CCDI unveiled the investigation of He, almost nine years after his retirement as deputy head of the STMA. Weeks later, He’s former subordinate in China Tobacco’s Anhui branch, Zhu Jianhua, died by suicide.
In January and February, Jiang Yawei, former chief economist of China Tobacco Anhui, and a deputy director of STMA’s Anhui branch, Yu Jinxiang, were also brought under investigation.
This article was first published by Caixin Global as "Cover Story: China’s Tobacco Monopoly Is Swept Up in Corruption Probes". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.
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