China's State Tobacco Monopoly Administration (STMA) Tuesday denied a report that it had approved British American Tobacco's (BAT's) application to establish a cigarette joint venture.

The London-based cigarette maker issued a statement last Friday saying that the Chinese government had approved its major strategic investment in the country.

According to the statement, BAT expects to team up with China Eastern Investments to set up an 800-million-pound (US$1.5 billion) JV to produce and sell its cigarettes in China.

"We did not approve the project, and we are surprised to hear the report," said Wei Xinhua, deputy director of the STMA's General Office, on Tuesday.

In accordance with the Law on Tobacco Monopoly, the establishment of a new cigarette factory must be approved by the STMA.

"I am wondering why BAT said the Chinese government had approved the project," he said, adding that his office will make an announcement on this issue in two days.

But in response to questions Tuesday, British American Eastern, BAT's subsidiary in China, said, "the approval comes from the central government."

BAT's announcement last week shook up the global tobacco industry, because the joint venture would be the first foreign tobacco firm to get the green light to manufacture cigarettes in China and would probably be the biggest cigarette factory in the country.

BAT, already the world's second-largest tobacco company, said that the new JV would have a manufacturing capacity of 100 billion cigarettes per year, dwarfing its existing 180 factories.

That is expected to give BAT's leading brands a 5 percent share of China's tobacco sales, the company said.

It plans to make State Express 555 -- the most popular foreign cigarette in China -- together with its other brands in the factory and distribute its products nationally.

"For us it represents a major growth opportunity whilst contributing to the Chinese government's excellent efforts to continue developing the performance of the country's tobacco industry," said BAT Chief Executive Paul Adams. "We look forward, with our partners, to finalizing the detailed work in close cooperation with the Chinese government."

The company said further details about the JV, including its final location and arrangements, would be announced in due course.

BAT produced 792 billion cigarettes last year and has a 15 percent share of the world's tobacco market. The company, through its partner China Eastern Investment, imported over 1 billion cigarettes into China last year.

Foreign tobacco companies are eager to establish bases for domestic production in China, which is the world's largest cigarette market with annual sales of around 1.8 trillion cigarettes, while the European and American markets are shrinking. Although foreign makers have been selling cigarettes in China for many years, tariffs are as high as 65 percent.

But STMA's Hu Xinhua said that the country will not currently approve the establishment of any new cigarette factories, as manufacturing capacity exceeds demand.

China plans to close or merge all its small cigarette factories -- those with annual production capacity of fewer than 100,000 cartons (5 billion cigarettes) -- by the end of this year.

(China Daily July 21, 2004)