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China’s Gray Market

China's not so black market gives a less-sketchy way to buy foreign goods

10·14·2014

China’s Gray Market

China's not so black market gives a less-sketchy way to buy foreign goods

10·14·2014

We’ve all heard of the black market. Horror stories of body parts sold online, narcotics trades that end in murder, and live exotic animals that may or may not belong to foreign leaders leap to mind when thinking of China’s notorious ability to provide any product to someone wishing to pay. But China’s grey market actually makes a whole lot more of an impact that its sketchier sister.

We’ve seen the goods, heard the stories, and almost everyone who’s lived or been to China has bought something from an outlet considered part of the gray market. But what is a gray market exactly? First and foremost, the gray market goods are not knockoffs.  In technical terms, any trade of real goods through unofficial channels can be considered the gray market, whether it be Prada or financial securities, though it is primarily the buying and reselling of products for a premium.

China provides a particularly good environment for a gray market. First, large limitations on foreign imports create a high demand for products that can’t be found on the mainland. Second, the lack of quality assurance drives up the demand for foreign goods for those willing to pay. According to research published by the Boston Consulting Group in 2012, 60% of Chinese consumers say they are willing to pay more for products manufactured in the United States. Weibo users constantly complain about mainland goods, saying that they are “the worst quality and the most expensive.” Even goods manufactured for foreign countries in China are rumored to be higher quality than those made for Chinese nationals.

The Chinese government knows this, so heavy duties on foreign imports creates the third factor in fostering the gray market- the availability of these goods at much higher prices than consumers want to pay because of import duties and taxes. Thus, the gray market is created, where smart business people see an opportunity to move goods from where they are cheaper to where they can be sold for a premium. Whether buying wholesale from mainland factories or foreign countries, the thriving gray market deals in anything from cosmetics and luxury goods to baby formula and video game consoles.

China has two primary ways of moving goods, known as parallel imports, through the gray market: the use of China’s factories to smuggle out goods manufactured for foreign brands, as well as the physical cross-border smuggling through middlemen and overseas personal shoppers. The wholesale selling is the cleanest of the transactions; cross-border “parallel imports” however, are on the darker side of the grayscale.  If import duties are paid correctly and the customs protocols followed, the gray market is technically legal (however few importers actually follow those regulations). This creates the most important difference between the black market and the gray market- gray market goods are sold in obvious places, such as malls and online. But much like the black market, it follows the universal law that if you can pay for it, you can have it.

Smugglers danced a little jig when they heard that Hong Kong and Taiwan would have the new models available before the Chinese mainland since they could take them across into Shenzhen and receive almost four-times what they paid for the initial phone. Known as haiwai daigou, these smugglers buy goods in markets such as Hong Kong or even across the ocean in the US, which are otherwise too expensive, unreliable, or unavailable in the Chinese mainland.

Since Chinese officials charge up to 50% duties on electronics that aren’t for self-use, smugglers have had to get creative to get the iPhones across the border. Often students are paid to carry the phones in their schoolbags, strapped to their ankles, or placed discreetly inside cream pies or toothpaste containers. Since prices for these phones have rose to around 3,500 USD in September, customs officials have collected thousands of iPhone 6s that smugglers attempted to bring across the border. Since some Chinese mainlanders are apparently willing to sell their children for the newest phone, what’s another 3,000 USD to get it early?

Another common gray market good is actually infant formula. Instead of getting the “latest craze” incentive, like with the iPhone 6, infant formula smuggling is primarily about quality assurance. Because of the baby formula scandal of 2008 which killed six infants with another 54,000 hospitalized, mothers with money are flatly refusing to buy China-made formula. This brings in our friend the gray market. People in Hong Kong will actually wipe the shelves of baby formula, smuggle it into the Chinese mainland, and make money through selling the formula for more than the Chinese-made but less than the officially imported brands of formula. Shenzhen’s customs authorities estimate that over 20,000 daigou work that specific border.

The use of, the infamous overseas personal shoppers, are another form of the Chinese gray market that appeals to the upper classes of Chinese society. Since luxury goods can cost up to 30% more in China, fashionistas wanting their Chanel-fix are turning to businesses run by savvy young entrepreneurs to buy and ship luxury goods from overseas stores to China. This can be anything from the newest Prada to wine and cosmetics- but for the daigou running the businesses, the need for prestige attitude of the Chinese rich continues to pad their pockets. Rachel Deng, a 23-year old Chinese graduate student in Washington, D.C., runs her own haitao business which searches for goods either too expensive or difficult to find in China, and ships them to her clients, following in the footsteps of other haitao business owners and providing her clients with American goods with a small service charge.

Alibaba, Taobao, and WeChat are playing fundamental roles in all gray market business, especially with goods sold directly from factories. These items aren’t fakes- an anonymous source swears by two Taobao stores where they sell real-deal items for far below foreign prices. An Anthropologie skirt, for example, could go for 80 RMB instead of 150 USD, though it would be the same high quality. Another store, run by a luxury purse designer, sometimes receives purses from foreign designers such as Kate Spade from the factory she uses, and resells these bags on Taobao. Telltale signs of these real but gray market products are slightly higher prices, lower quantities, and legitimate, fashion-industry store owners.

Services like Rachel Deng’s haitao business are also primarily run online, along with many other stores on Alibaba and Taobao that circumvent the China’s strict import process. However, this online model can turn dangerous, since users trusting Taobao or other online stores to buy foreign goods might actually be paying premium for dupes made in China. This is particularly dangerous in buying food or formula, and since the gray market is unregulated by the Chinese authorities, fakes can be disastrous for people’s health. These fakes are just as common with luxury goods, but buying a fake purse hurts people’s wallets more than their long-term wellbeing.

Unfortunately for Chinese manufacturers, the rising classes of Chinese consumers don’t want their products. With the demand rising for foreign goods, the Chinese export-heavy economic model moves closer and closer to import-heavy as Chinese nationals lose faith in the quality of their goods and look to less-legal avenues for their foreign alternatives.

Photo Courtesy of Flickr