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

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."