The Chinese government wants to overhaul the rules governing the market for electronic nicotine delivery systems (ENDS), according to the South China Morning Post.
Draft regulations posted online by the Ministry of Industry and Information Technology (MIIT) suggest seeking to regulate these products like traditional cigarettes. The ministry is seeking public comments on the draft regulations until April 22. With an estimated 300 million smokers, China is the world’s largest market for tobacco products and the largest potential market for ENDS.
The next eight thoughts and opinions on the draft for comments are as follows:
1.First of all, don’t worry too much. This is just for supervision and regulation, which is to legalize e-cigarettes, not prohibit them.
2.Supervision will happen sooner or later. Now that the draft for solicitation of comments has come out, according to my understanding, the basic framework will not change, and only the details will be improved.
3.As for the qualitative issue of electronic cigarettes that everyone is concerned about, it has already been qualitative. Now it is further clarified that: e-cigarettes are new types of tobacco products.
4.After selling e-cigarettes, a consumption tax will be charged. Cigarette excise tax in the production, delivery, and sales (or import), the proportional tax rate: 56% for category A cigarettes, 36% for category B cigarettes; wholesale link (referring to the sale of wholesalers to retailers): proportional tax rate: 11%. As for the specific payment of e-cigarettes, is it to be paid at the cigarette tax rate from the beginning? This depends on the follow-up policy details. The probability is the same.
5.The e-cigarette national standard that has attracted everyone’s attention is about to be introduced.
6.For terminal sales of electronic cigarettes, a tobacco monopoly retail license is required. As for whether electronic cigarette manufacturers and e-liquid manufacturers have to apply for production licenses, according to understanding, e-liquid manufacturers will most likely do. Once it is done, the barriers to entry into the industry are high, and it is no longer easy to enter.
7.It is estimated that heat-not-burn (tobacco-type) cartridges will soon be released in China.
8.In the long run, it will benefit large-scale e-cigarette companies and increase sales of regular products.
The news caused the share price of RELX, China’s largest e-cigarette brand, to plunge. At 2:45 pm today, its value on the New York Stock Exchange was down nearly 45 percent to $10.69 per share after a recent high of $19.46 per share on March 19.
RLX Technology raised $1.4 billion during its initial public offering (IPO) in January this year. It sold 116.5 million shares with a target price of between $8 and $10 a share. Its market debut turned its 39-year-old founder, Wang Ying, into a billionaire overnight with an estimated net worth of $24.8 billion.
In its prospectus, RLX stated that vaping products only have a 1.2 percent penetration rate in China, compared with 32.4 percent in the U.S. According to the China-based Electronic Cigarette Industry Committee, China’s 2020 e-cigarette sales were an estimated CNY14.5 billion ($2.2 billion), an increase of 30 percent from 2019. The U.S. e-cigarette market in 2019 was worth $5.34 billion, according to Grandview Research, which expects the U.S. market to reach $6.50 billion in 2020.
RELX recently announced a partnership with 110 authorized distributors to supply its products to more than 5,000 RELX-branded partner stores and more 100,000 other retail outlets nationwide, covering over 250 cities in China, according to its prospectus. Revenue for the company nearly doubled in the nine months ended September 30, 2020 to $324 million, with a net income of $16 million, the latest figures available at the time of this writing.
Vapor companies are increasingly facing scrutiny from regulators in China. In 2018, the country made it a crime to sell a vapor product to anyone under 18 years of age. In November 2019, an online sales ban was implemented in order to further prevent youth initiation. In 2020, the country passed the Law of the People’s Republic of China on the Protection of Minors. That law is aimed at preventing parents or other guardians from “indulging or instigating minors” to smoke or vape.
The China National Tobacco Corp. (CNTC), which holds a monopoly of tobacco manufacturing in China, is a major source of funding for the Chinese government. Its contribution accounted for an estimated 5.45 percent of the country’s tax revenue in 2018. That amounts to CYN10.8 trillion, according to media reports. The vapor industry in China, by contrast, remains largely in private hands. If CNTC were to enter the vapor market, the monopoly’s existing 5 million domestic retail outlets could present a major challenge for private vape shop owners.
Until today’s announcement, the vapor industry seemed to shrug off the impact of stricter regulations, continuing to perform well even in the face of the coronavirus pandemic.