STRATFOR ANALYSIS

Hong Kong: A City confronts its mainland parallels

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BOXES of diapers and milk powder block the entrance to the train. Inside the car, bags stuffed with cosmetics or electronics are crammed into every empty space. The passengers guard heavy luggage, their pockets bulging through oversize jackets. The direct train from Hong Kong to the city of Shenzhen on the Chinese mainland takes less than an hour, but I left the journey exhausted.

These are China’s “parallel traders,” travelers who make easy profits by buying goods from Hong Kong and reselling them in mainland China. The traders snap up everything from baby formula and tissues to cosmetics and iPhones, taking advantage of lower prices on some products in Hong Kong, a free port with zero or low duties for electronics and other imports. Customs officials say traders make an average profit of up to a few hundred yuan from each entry. According to some reports, 95 percent of people who make more than two border trips a day are parallel traders and the number of such travelers is about 20,000.

Parallel traders infuriate many Hong Kong residents, not because they crowd metro platforms, but because they represent the increasing influx of mainland Chinese who come to the city to benefit from its maternity hospitals, shops and real estate market. The mainlanders are seen as a drain on the city’s space and resources, as well as a reminder of Beijing’s meddling in Hong Kong’s economy and politics. The presence of smugglers has already triggered flare-ups in Hong Kong. Anti-parallel trade protesters demonstrated this month in Hong Kong, heckling and in some cases assaulting mainland visitors.

But parallel trade is not a new trend, nor is it unique to Hong Kong. In fact it is a fairly common practice worldwide that happens along U.S. borders and in parts of Europe. In the 1960s and 1970s, Turks regularly crossed into Iran to sell fruit and brought back the cheaper household goods for resale inside Turkey. The public outrage in Hong Kong over a fairly ordinary global practice is a symptom of greater tensions stemming from China’s fraught “one country, two systems” policy toward Hong Kong.


On the Frontier
In Hong Kong, the city changes as one moves north from the congested central part toward the Chinese metropolis of Shenzhen, where the Hong Kong’s New Territories abut the mainland. It is along this frontier that the dynamic between the two worlds is playing out.

As compared to the central part of the city, the streets are wide and the air is noticeably grayer. The high connectivity in this part of the city — as well as the ease with which the border can be reached — remind Hong Kong residents of the increasing integration with the mainland. Shopping centers balloon in size and many are linked to residential complexes and metros through an elaborate network of footbridges and indoor walking tunnels. Local Hong Kong activists worry that the farmland on the city’s periphery will gradually give way to shopping malls and high rises.

Hong Kong’s transit infrastructure is efficient and mainland visitors can move from one of the city’s many shopping hubs back to Shenzhen on the same day. From Kowloon district, a swift ferry or metro ride from the central financial hub, one can board a train that connects all the way to the border. These trains pass through districts in the New Territories where streets are lined with stores packed with boxes of diapers, soap and laundry detergent — products targeted at mainland customers. In one of these districts, Sheung Shui, residents say the influx of mainlanders has driven up the prices of these goods. There are also buses that leave from the city center and take people through the border into Shenzhen’s main transport nodes, interrupted by a brief walk through no man’s land at the checkpoint.

The number of smugglers has increased thanks to the 2003 easing of entry-exit barriers with the mainland. Those who are registered residents of Shenzhen can obtain multiple-entry permits. Symbolically, visits from non-permanent residents from Shenzhen have risen on Chung Ying street — a thoroughfare divided between China on one side and Hong Kong on the other. It is mostly a sightseeing destination now. When the British held Hong Kong, however, Chung Ying street was where the Chinese could access foreign goods before the easing of entry rules made Hong Kong itself the access point for foreign products.

There has long been talk of fully developing the New Territories into a frontier zone between Hong Kong and the mainland. Officials have reportedly floated the idea of allowing mainland visitors to enter this zone without a visa, though the prospect of public backlash has stalled such discussions.

Chinese demand
The resentment of mainland Chinese visitors is not confined to Hong Kong. It has sprung up in other parts of the world — especially as more and more mainlanders build up disposable income and spend it on travel. In factory outlet malls in the San Francisco Bay Area, I have often seen tour buses full of Chinese travelers. In both Paris and London, residents have become vocal in their complaints about Chinese shoppers. A swanky French hotel caused outrage in 2012 when it banned Chinese guests.

Hong Kong’s confrontation with this trend is notable not because of the cultural clash or because of xenophobia, but because it indicates how far China has to go to rebalance and shift to foster its own a consumer-led economy. Hong Kong’s popularity comes from the mainlander perception that foreign goods are better than Chinese-made items. Cross-border parallel trading may not make a dent in Chinese consumption figures in the macro economy, but the pattern highlights the challenges China faces in its push to spur consumer spending at home.

High demand among consumers, paired with high import duties in China, has created a thriving gray market for tax-free goods. China’s Ministry of Commerce has openly called for import tax cuts on consumer goods, but the measures will likely be slow in coming. As of now, China’s import duty and value-added tax mean some luxury items are more than 30 percent cheaper in other countries. Import duties on cosmetics can run as high as 40 percent — excluding an additional 17 percent value-added tax.

More important, the popularity of parallel trading indicates a lack of faith in Chinese products, triggered by consumer scandals involving everything from melamine-tainted milk to cooking oil recycled from gutters. In Hong Kong, it’s not only the designer fashions flying off shelves, but common household goods in demand from one of the world’s largest groups of middle-income consumers.

For the short term, Guangdong province is proposing a law to cap the number of daily border crossings. Border authorities say they will be more vigilantly inspecting bags for smuggled goods as well. But until more remarkable changes occur in Chinese consumption and economy, Hong Kong, a city that boasts itself as Asia’s world city, may continue to be fearful of those seen as endangering its valued political system and way of life.

© 2015, STRATFOR GLOBAL INTELLIGENCE

Publishing by The Manila Times of this analysis is withy express permission of STRATFOR.

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