Tea Leaf Nation

China's Growing Gray Market for All That's Foreign

Forget about those pesky regulations; business is booming for practitioners of "haitao."

WASHINGTON, D.C. — Before 23-year-old Rachel Deng came to Washington, D.C., from China for graduate school, she began to plan her U.S. business. She used WeChat, a popular Chinese messaging application, to set up an online marketplace where her friends and relatives in China could place orders for U.S. goods. She now scours outlet stores, online shops, and department stores like Nordstrom and Neiman Marcus for products like handbags, skin-care products, and nutritional supplements to send back to her roughly 2,000 clients in China. It's a practice called haitao, which translates roughly as "searching abroad," and it's a growing business in a status-obsessed country where incomes are rising but domestically made products remain suspect.

China's haitao industry has come under the spotlight in recent weeks. On Aug. 1, China's customs agency put into effect a new rule stipulating that all enterprises and individuals engaged in cross-border sales must provide a list of imported and exported items to customs authorities. If enforced, the regulation could compel small companies like Deng's to exit the industry, making way for larger, easier-to-regulate haitao services, like those owned by Alibaba and JD.com, China's biggest e-commerce companies by transaction volume. At least in the near term, however, customs officials are likely to have a difficult time enforcing the rule among the informal, small-scale businesses that currently dominate the industry.

The haitao market has boomed since September 2008, when domestically made baby formula tainted with melamine killed six infants and sickened hundreds of thousands more. Frantic parents cleared mainland shelves of foreign baby formula and then turned to Hong Kong, a city run under a system separate from the mainland, where daigou, or buying agents, began carrying formula over the border into China. The volume of demand from the mainland caused shortages in Hong Kong, where local parents complained loudly. Hong Kong authorities had to place strict limits on the amount of baby formula that could be carried out of the territory. In January, the Hong Kong customs bureau arrested 64 people for smuggling infant formula into the mainland.

The infant-formula scandal jump-started a more widespread use of daigou buyers. The customs bureau in Shenzhen, the mainland city just north of Hong Kong, has estimated that more than 20,000 daigou ply the border. Often advertising their services and wares on Chinese websites, daigou import foreign medicines, baby products, cosmetics, and especially luxury items in order to evade China's hefty luxury tax. A 2013 survey by U.S.-based consultancy Bain & Company found that at least 60 percent of Chinese luxury consumers had used daigou to purchase products from abroad. (Daigou are legal if they pay the proper customs fees, but many evade them.)

In a country with a track record of pumping out shoddy or even toxic products, foreign goods have long been synonymous with quality and prestige in China. This remains true even as Chinese factories have gained the capability to produce more technologically demanding products. According to research published by the Boston Consulting Group, a management consulting firm, in November 2012, more than 60 percent of Chinese consumers surveyed said they would be willing to pay more for products made in the United States. While some Chinese are attracted to the cachet of foreign brands like Nike, Gucci, and BMW, many insist that products made for foreign customers are simply of higher quality. "The same brand, the same material, both made in China. One product goes to the United States; one is sold domestically. The quality is obviously different!" wrote one user in a typical post about the subject on Weibo, China's massive microblogging platform, probably while complaining about an unhappy purchase. "After today, I'll try my best to haitao or buy goods abroad. It's not that I worship foreign goods; it's that the disparity is really that big." Another complained that "mainland goods" are "the worst quality and the most expensive." One wrote that finding children's clothes at a local mall had been impossible, eliciting a suggestion to "start looking into haitao."

China's demand for foreign products means big opportunities for both U.S. retailers and Chinese websites. A July 2013 study by Nielsen, an information and measurement company, and PayPal, an online payment platform, estimates that the Chinese cross-border shopping market will quintuple by 2018, to $161 billion. Macroeconomic trends also appear to favor the haitao market. Beijing has stated plans to switch to a consumer-driven economy as its investment-heavy economic model runs out of steam. An appreciating renminbi and liberalizing interest rates would put even more buying power into the hands of Chinese consumers. U.S. exports to China have already increased by almost $40 billion in the past four years alone, reaching $106 billion.

The ubiquity of Chinese-made fakes, however, makes haitao a risky game for Chinese consumers. Irene Zhang, a graduate student in Washington, D.C., told Foreign Policy that she purchased foreign goods through daigou on Taobao, a popular eBay-like platform owned by Alibaba, the Chinese e-commerce giant. Although daigou claim to be selling foreign goods, some are really peddling Chinese-made fakes, said Zhang. "If you buy expensive bags from Taobao, it is highly possible that they are fake," she says.  

Hangzhou-based Alibaba, which handles 80 percent of online shopping in China, may be uniquely poised to capture the haitao market -- but only if it can convince consumers that the products are real, says Julia Q. Zhu, the founder of Observer Solutions, an e-commerce research and advisory firm. "That's how they get market share," Zhu told FP. "They know if they can't solve the issue of fakes, they can't do anything" in the haitao market. Alibaba, which is preparing for what is sure to be a gigantic initial public offering in the United States, seems sensitive to these concerns. In February, Alibaba launched e-commerce platform Tmall Global, which sells guaranteed-genuine foreign brands directly to Chinese shoppers. (Foreign brands can also set up shop on Taobao and Tmall, but they must have a legal entity in China).

Of course, ordering directly from foreign websites like Amazon, Apple, and eBay would also help consumers avoid the risk of paying premium prices for fake goods. But many Chinese do not have the English and web skills to navigate foreign payment systems and delivery services, so a crop of haitao websites has sprung up to help Chinese consumers bridge the gap. These sites either connect directly with underlying U.S. sites or send buyers directly to U.S. shops, handling the foreign payment and shipping issues onerous to Chinese buyers. For example, Haitaocheng.com ("haitao city") provides a Chinese-language interface for foreign websites, and any orders made on the Chinese site are placed directly with Amazon and other foreign vendors. The best sites also guard against fakes in innovative ways; Ymatou.com (meaning "foreign port") claims to run credit and identity checks on its American buyers, and it offers a mobile app that verifies in which foreign store goods have been bought. Yet foreign e-commerce giants may be catching on the haitao trend as well. On Aug. 20, Amazon announced that it will establish a large office in the free economic zone in Shanghai and plans to ship goods bought on Amazon's U.S. site directly to Chinese consumers by the end of 2014.

In the near term, Deng has high hopes for her haitao business. She admits that regulation is an issue, but says that the haitao industry "has not crossed the line" to become sufficiently irritating to authorities to merit a crackdown. Eventually, she says, Chinese consumers won't need services like hers, as China reduces its high tariffs on imported goods and foreign brands enter and expand their business in the Chinese market. "But it will take a long time," she says. "Until then, people like me can make some profit."

Photo via AFP/Getty Images

Tea Leaf Nation

'Today's Hong Kong, Tomorrow's Taiwan'

Emerging solidarity between Hong Kong and Taiwan activists promises more headaches for Beijing.

TAIPEI, Taiwan — Two days before Hong Kong's annual July 1 pro-democracy march, 23-year-old Chen Wei-ting hopped on a plane from Taipei in the hope of joining the rally -- only to be denied entry and forced to return the same day. The government of the Hong Kong Special Administrative Region, an erstwhile British colony now under Chinese sovereignty, had refused to issue visas to Chen and Lin Fei-fan, student leaders of Taiwan's anti-mainland Sunflower Movement. On the day of the demonstration, state-run People's Daily ran an article in which a few pro-Beijing figures within Hong Kong condemned Chen's disregard of Hong Kong law. The article quoted lawmaker Wong Kwok-hing: "The behavior of these Taiwanese separatists is worrying. Aside from damaging 'one country, two systems,' such collaboration will be detrimental to Hong Kong's prosperity and stability." The writeup succinctly summarized Beijing's sentiments towards the closer collaboration between anti-mainland Hong Kong and Taiwanese activists: Irritation, suspicion, and perhaps a bit of paranoia.

From driving out corruption to bolstering flagging economic growth, Chinese President Xi Jinping and his aides in Beijing already have plenty of problems to worry about in the Chinese heartland. But for China's party-state, whose constitution contemplates the "great task of reunifying the motherland" of the "sacred territory of the People's Republic of China," the apparent convergence of civil society movements on its periphery -- in democratic, self-ruling Taiwan and former British colony and now semiautonomous Hong Kong -- promise more headaches for an increasingly assertive and interventionist Beijing.

Taiwan's Sunflower Movement, in which university students occupied Taiwan's legislature from March 18 to April 10 to protest a free-trade agreement with China, suggests convergence between Hong Kong and Taiwanese activism. During the large-scale protest in the Taiwanese capital of Taipei, one of the most commonly chanted slogans was "today's Hong Kong, tomorrow's Taiwan." Some Hong Kong tourists and students also joined in, with one of them wearing paperboards that read "I am a Hong Konger. Taiwan, please step on Hong Kong's corpse and contemplate the path you want to take." A photo featuring the protester bearing the grave message, pictured above, went viral.

This level of support between Hong Kong and Taiwanese activism appears to be a new phenomenon. On the Wisers Information Portal, a search engine that contains news clips from major news outlets from the Chinese-speaking region, between June 1 and July 15, 126 articles published in Taiwanese newspapers and magazines contained the search term "Hong Kong July 1 rally," referring to the civil rights protest that has been an annual Hong Kong tradition since its handover to the mainland in 1997. The number of such articles during the same period last year was only 44; the year before that there were only 19. People in Hong Kong have started to pay closer attention to developments in Taiwan, too. On March 30, when the Sunflower Movement was in full swing, about 1,000 people in Hong Kong joined a march in solidarity with student protesters occupying the Legislature in Taipei.

While some members of the Hong Kong and Taiwan public have concluded only recently that Taiwan and Hong Kong are facing similar threats from China, activist leaders and organizers received earlier hints showing their fates were becoming intertwined. One example was a November 2012 letter written by famed sinologist Yu Ying-shih, a professor emeritus of Chinese studies at Princeton University, to Huang Kuo-chang, a law professor who later played an important role in the Sunflower Movement. Later posted on Facebook, the letter urged the Taiwanese to pay close attention to developments in Hong Kong and learn from the city's young dissidents how to resist Beijing's encroachment. "The driving force behind the two movements was the Chinese Communist Party ... and only then did I realize that we are facing similar problems," Chen, the Sunflower Movement leader, told Foreign Policy.

From July to September 2012, activists in Hong Kong staged protests against making national education a mandatory subject in primary and secondary schools, which critics argued would instill blind pro-mainland patriotism in students. During its peak, organizers said, more than 120,000 people gathered at Hong Kong's government headquarters. Almost at the same time in Taiwan, starting in July of that year, two major media deals spurred an anti-media monopoly movement. The first was the planned merger of Want Want China Times Media Group, a subsidiary of Taiwan-based food manufacturer Want Want China Holdings, which already owns several television channels, newspapers, and magazines, and China Network Systems, a cable television provider which has more than 1.2 million subscribers. Taiwanese authorities approved the takeover in late July in 2012, sparking the first wave of protests, including a September rally with a turnout of 9,000. University students formed a group named "anti-media monopoly youth alliance," joining forces with academics and journalists to oppose the transaction.

Four months later, Hong Kong media mogul and mainland gadfly Jimmy Lai signed an agreement to sell print and broadcast media to five businessmen, one of them being Tsai Shao-chung, son of Want Want China Holdings Chairman Tsai Eng-meng. Again, students spearheaded efforts, ranging from social media campaigns to an overnight sit-in on New Year's Eve, to mobilize public opposition. (Both deals were later aborted, the first axed by Taiwanese authorities and the second due to a withdrawn bid.) Wu Jieh-min, associate research fellow at the Institute of Sociology at Academia Sinica, a state-funded research institute in Taipei, believes that the rise of an authoritarian China has become a common threat to civil liberties in both Hong Kong and Taiwan. "The China factor has become a global anxiety with profound influences in Asia ... but Hong Kong and Taiwan bear the brunt," Wu told FP.

Hong Kong offers a sobering lesson for Taiwan on the potential dangers of further integration with China. Hong Kong was returned from British rule to Chinese sovereignty in 1997 with the promise that it would remain self-governing for 50 years. But since the handover, Beijing has asserted informal control through quiet contacts with legislators, government administrators, and business leaders. For example, some Hong Kong business magnates and their children have been appointed members of the Chinese People's Political Consultative Conference -- an honorary title without real political power but nevertheless one that smoothes business transactions on the mainland. In the past, "one country" and "two systems" were given equal footing, as honored in the Basic Law and the Sino-British Joint Declaration, a binding international agreement. But in June, the mainland's State Council released a white paper, which sets out to redefine "one country, two systems" by asserting that the only source of Hong Kong's autonomy is Beijing's authority. In other words, the principle of "one country" precedes that of "two systems."

An important reason behind Beijing's quickly dissipating patience with Hong Kong is the city's increasing economic reliance on the mainland. Beijing further cemented its grip on the city after 2003, as Hong Kong and mainland China signed a free-trade agreement called the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), after the SARS epidemic battered the territory's economy. Coupled with breakneck economic growth, mainland China has become Hong Kong's largest trade partner. Last year, merchandise trade with China comprised more than half of the city's total trade and totaled $502 billion, 2.5 times higher than $197 billion, the total trade with the mainland in 2003. By 2005, China had replaced the United States to become the largest importer of Hong Kong's exports.

China used to flex its military muscle in an attempt to intimidate Taiwan. During the 1996 presidential election, the mainland's People's Liberation Army conducted a series of missile tests in an attempt to scare voters from re-electing the pro-independence Lee Teng-hui. But China has since discovered that money can be far more effective, and has subsequently resorted to cultivating a closer relation with Taiwan's ruling Kuomintang party. The strategy has been successful. In 2005, when the pro-independence Democratic Progressive Party was in power, Lien Chan became the first Kuomintang chairman to visit Beijing after the party lost the civil war in 1949. Last year, 40 percent of Taiwan's exports, valued at about $121 billion, went to China (including Hong Kong and Macau). The mainland's ruling Chinese Communist Party and the Kuomintang also signed the Economic Cooperation Framework Agreement (ECFA), modeled on Hong Kong's CEPA, in June 2010, further consolidating economic interdependence.  

The party has successfully leveraged economic ties with both Hong Kong and Taiwan, but such a tactic has its own limitations. As the shadow of Beijing grows in both places, more people are turning their heads, and hearts, away from the mainland. According to a poll on Taiwanese identity conducted by National Chengchi University and published in July, a record-breaking 60.4 percent of respondents said they only identify themselves as Taiwanese, while only 32.7 percent think they are both Chinese and Taiwanese. In 2008, the year when pro-Beijing Ma Ying-jeou was sworn in as Taiwan's president, only 48.4 percent of pollsters identified themselves as only Taiwanese; another 43.1 percent said they were both Taiwanese and Chinese. The percentage of people who only consider themselves Taiwanese has risen at a quicker pace during Ma's tenure than during the presidency of his predecessor, Chen Shui-bian, who favored independence.

Similar trends are also visible in surveys that gauge Hong Kong citizens' identities. According to a June 2014 poll published by the University of Hong Kong's public opinion program, 67.3 percent of interviewees said they were "Hong Kongers" or "Hong Kongers in China." A decade ago, less than 50 percent of those polled gave that answer.

Sing Ming, an associate professor of the Division of Social Sciences at the Hong Kong University of Science and Technology who focuses on comparative politics, uses the term "symbiosis" to describe the Hong Kong-Taiwan relationship. "As Hong Kong faces increasing suppression, it can remind Taiwanese to raise their guard [against the erosion of democracy and civil liberties]," Sing told FP. "The growing distance between China and the Taiwanese, in turn, increases the bargaining power of Hong Kong."

None of this means the emerging convergence of Hong Kong-Taiwan activism poses an immediate, substantial threat to Beijing. It is inherently difficult for activists to engage citizens in inter-regional activism, so in the near term, the collaboration will likely take the form of closer intellectual exchange and calls for mutual support during mass movements. In the eyes of party leaders, however, such cooperation can potentially lead to the confluence of the independence movements of Taiwan and Hong Kong, encouraging separatists across the country to follow suit and thus threatening to turn the party's worst nightmare -- China's disintegration -- into reality.

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