<P> In the 18th century, Britain had a huge trade deficit with Qing dynasty China and so, in 1773, the company created a British monopoly on opium buying in Bengal, India by prohibiting the licensing of opium farmers and private cultivation . The monopoly system established in 1799 continued with minimal changes until 1947 . As the opium trade was illegal in China, Company ships could not carry opium to China . So the opium produced in Bengal was sold in Calcutta on condition that it be sent to China . </P> <P> Despite the Chinese ban on opium imports, reaffirmed in 1799 by the Jiaqing Emperor, the drug was smuggled into China from Bengal by traffickers and agency houses such as Jardine, Matheson & Co and Dent & Co. in amounts averaging 900 tons a year . The proceeds of the drug - smugglers landing their cargoes at Lintin Island were paid into the company's factory at Canton and by 1825, most of the money needed to buy tea in China was raised by the illegal opium trade . </P> <P> The company established a group of trading settlements centred on the Straits of Malacca called the Straits Settlements in 1826 to protect its trade route to China and to combat local piracy . The settlements were also used as penal settlements for Indian civilian and military prisoners . </P> <P> In 1838 with the amount of smuggled opium entering China approaching 1,400 tons a year, the Chinese imposed a death penalty for opium smuggling and sent a Special Imperial Commissioner, Lin Zexu, to curb smuggling . This resulted in the First Opium War (1839--42). After the war Hong Kong island was ceded to Britain under the Treaty of Nanking and the Chinese market opened to the opium traders of Britain and other nations . The Jardines and Apcar and Company dominated the trade, although P&O also tried to take a share . A Second Opium War fought by Britain and France against China lasted from 1856 until 1860 and led to the Treaty of Tientsin, which legalised the importation of opium . Legalisation stimulated domestic Chinese opium production and increased the importation of opium from Turkey and Persia . This increased competition for the Chinese market led to India's reducing its opium output and diversifying its exports . </P>

Where did the british east india company first established settlements