China’s government is hooked on cigarette revenues. In 2012 the tobacco industry turned over 717 billion yuan in profits and taxes to government coffers, which made up 6% of official revenue. Not surprisingly, tobacco is as big in Beijing politics as petroleum and property. And in provinces, like Yunnan, where they grow tobacco, that influence is even greater.
In theory, the central government could drive up the cost of smoking without losing income. Since it controls the monopoly, any lost profits can be made up as tax revenues. But costlier cigarettes would not be popular on the street and leaders may not want to risk it. And since the industry regulates itself, it is unlikely to suppress the source of such handsome profits.
So, while outsiders have wondered how China will support its aging population with an ever smaller base of workers, problems may strike sooner than that, as the deleterious effects of smoking take their toll on health costs. People may actually die sooner because of the smoking, but they will have a cost a lot in health care in the process. Maybe the Chinese government can pay for that from its cigarette tax revenues :)