Tea Leaf Nation

Hong Kong's Inconvenient Truth

Some desire political independence, but the city looks to the mainland for most of its resources.

HONG KONG — Around Hong Kong, the former British colony now subject to Chinese sovereignty, the central government in Beijing is widely, though none-too-fondly, called "Grandpa." Implicit in this moniker is what Siu-keung Cheung, a sociologist at Shue Yan University in Hong Kong, characterized in an interview with Foreign Policy as the "control of bodies and lives" -- through which Beijing presents itself as the generous benefactor to compatriots in Hong Kong.

Even as the grassroots campaign in Hong Kong to wrest greater autonomy and other freedoms under Beijing's one-country, two-systems constitutional framework has intensified, the city's long-standing dependence on the mainland for basic necessities like water, food, and energy rarely gets a mention. But if Hong Kong has anything to learn from its colonial ruler's experience in negotiating with Beijing, it's that the cold, hard realities of resource dependency can translate into political concessions.

Although not quite a piece of "barren rock" as derided by Lord Palmerston, Britain's foreign secretary during the First Opium War, from 1839 to 1842, the fact remains that Hong Kong isn't endowed with the necessary natural resources to support its population of 7 million. The Hong Kong special administrative region of China gets over 70 percent of its water from Dongjiang, a river in neighboring Guangdong province. Meanwhile, over 90 percent of fresh meat and vegetables consumed in Hong Kong is sourced from the mainland. And mainland energy sources generate more than half of the electricity consumed locally.

Many Hong Kongers in the staunchly capitalistic city tend to regard the supplies as mere business transactions with an equally capitalistic state, not least because the city pays market prices. Most people have also taken it for granted that water will keep flowing and live pigs will keep being trucked in from across the border. But decades before the reversion to Chinese sovereignty in 1997, the political ramifications of Hong Kong's resource dependency loomed large in the minds of British colonial officials. And as the tug of war between Hong Kong and the mainland over universal suffrage intensifies, these issues may come to hold greater sway in the public consciousness.

When British colonial officials exercised control over Hong Kong, they were deeply preoccupied with Hong Kong's use of mainland water. After China's civil war ended with the Communist victory in 1949, hundreds of thousands of refugees poured into the tiny territory and strained its scarce water resources. Rationing became a fact of life. In 1960, Guangdong provincial officials and the colonial government struck a deal allowing Hong Kong to pipe in water from a reservoir recently completed in Shenzhen, now a megacity of over 10 million but then a sleepy part of a rural county. Beijing offered the water for free, but Hong Kong's colonial government rejected the overture because it saw Beijing's offer as a political ploy, and it insisted instead on a strictly commercial transaction. The Chinese agreed and in return earned badly needed foreign currency and, later, funding for treatment infrastructure. This laid the groundwork -- both hydrological and geopolitical -- to draw the colony closer to the mainland.

A few years into the 1960 supply agreement, a severe drought limited water rationing to four hours every four days. Since then, continued population growth and climate change have made Chinese water even harder to reject. According to Hong Kong government figures, in 2012, Hong Kong depended on the mainland for 76 percent of its water supply, up from 22 percent in 1965.

During the Sino-British negotiations over Hong Kong's sovereignty, which began in 1982, water supply ranked high on the list of concerns. (Dependence on water from the mainland was 34 percent in 1980.) Percy Cradock, then the British ambassador to China and who was involved in the negotiations, warned Prime Minister Margaret Thatcher that the British had little bargaining power because Hong Kong so heavily relied on the mainland for fresh water. The British eventually made significant concessions and gave up all of their rights to Hong Kong.

The fact that water might have sealed the city's fate on the negotiating table seems like ancient history in post-handover Hong Kong. But it has not been forgotten; in August 2010, Nelson K. Lee, a lecturer in government and public administration at the Chinese University of Hong Kong, published the results of archival research and argued that the British had given up pursuing water independence for Hong Kong as a part of the handover negotiations, while China had intentionally increased the quantity of water supplied to Hong Kong in order to tighten the mainland's leash on the territory. "This certainly captured the attention of the pro-[Hong Kong] independence movement," Lee told FP. Lee said that was true "even for ordinary Hong Kongers," making the general public "more attuned to the politics behind what used to be formulaic economic calculations."

This shift is evident in the recent backlash against the Hong Kong government's proposal in early 2014 to tap more electricity from the China Southern Power Grid in Guangzhou. The proposal, if implemented, will result in Hong Kong relying on the mainland for more than 90 percent of its energy needs. A chorus of opposing voices, ranging from environmental groups to the local electric utilities duopoly, roared when public consultation completed in mid-June.

As it is, Hong Kong already relies on the mainland for about half of its electricity. Natural gas piped in from a gas field on the Chinese island of Hainan provides about a quarter of the electricity supply for Hong Kong, about another quarter comes from Daya Bay Nuclear Power Station in Shenzhen, and the rest comes from coal imported from elsewhere, including from the mainland. When the Daya Bay plant was being planned in the mid-1980s, Hong Kongers took to the streets to protest, with many citing the meltdown of a nuclear reactor in the then-Soviet city of Chernobyl in April 1986 as a dangerous precedent. But in the end, the energy-hungry city became one of the plant's largest customers. There's one source of dependency that is already nearly absolute: fresh meat and produce. According to Hong Kong government figures, Hong Kong gets all of its fresh beef, 94 percent of its fresh pork, and 92 percent of its fresh vegetables from the mainland. 

To be sure, Beijing has not threatened to pull the plug on water, food, and electricity for Hong Kong -- that would not be politically astute. "At the end of the day, the party is all about paternalistic politics, but it can't use water and food as bargaining chips. The cost of using them as such is simply too high," said Cheung. "Because once the trigger is pulled, it'll backfire." 

Photo by Alex Ogle/AFP/Getty Images

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