The Grey Market for Foreign Products in China

Foreign baby formula 
is worth its weight 
in gold in China!

Daigou's are overseas Chinese who either work, travel, or study in a foreign country and sell items purchased abroad for resale in China.  They take advantage of price differences between the products sold in China and the same products sold in the rest of the world.  Recently, daigou's have received a great deal of attention in the press.  News outlets continually chronical high-profile shortages of baby formula in Australia, Hong Kong, and elsewhere caused by Chinese middlemen buying the product in bulk for resale in China.  Several factors contribute for the demand for foreign products in China.  First, Chinese consumers do not trust domestic brands because of a series of deadly safety scares.  Second, Chinese consumers often prefer foreign brands because of their status and higher quality.  

Designer bags are very
popular

Chinese consumers who purchase foreign products in China must pay high and clandestine taxes.  These taxes dramatically increase the prices of popular consumer products in China.  In many cases, the government levies these high taxes on foreign brands made in China.  Milk powder, luxury bags, vitamin supplements, and electronics are popular items sold by daigou’s.  In November of 2017, the Chinese government cut the average import tax from 17.3% to 7.7%.  However, the incredibly opaque method of how, when, and at what rate the government levies import taxes makes this claim suspect.   

Chinese consumers circumvent the high taxes by buying products through daigou's.  They buy products while abroad and ship the products back to China for sale at a markup.  Despite the costs and time involved in this practice, it is still cheaper for Chinese consumers to buy products through daigou's than from retail outlets in China.  The fact that many of the products purchased abroad and sold by daigou's in China have "made in China" stamped on the back of them makes this practice incredibly surreal.  For example, something is:

1.  Made at a factory in China

2.  Shipped to a port    

3.  Loaded on a ship and shipped across the Pacific Ocean

4.  Unloaded at a port in America

5.  Loaded onto a truck and shipped across the country

6.  Unloaded and put on display in a store

7.  Purchased by a daigou (after they receive an order from a consumer back in China)

8.  Purchased, packaged, and shipped by the daigou

9.  Sent to a sorting facility

10.  Shipped to a port 

11.  Loaded onto a ship 

12.  Sent across the Pacific Ocean

13.  Unloaded at a port in China

14.  Shipped by truck to a sorting facility

15.  Delivered by a delivery service to the Chinese consumer in China

And the item still costs less than if the Chinese consumer bought it off the shelf at their local store!

Items like this a 
listed on
WeChat accounts

Daigou's use the Chinese social media platform WeChat to list products available for purchase in stores.  Daigou’s take pictures of the items and upload them as a “WeChat Moment,” which is similar to a Facebook “Status Update.”  Go to a Costco or Wal-Mart in any major city, and you will likely find Chinese people taking pictures of products with their phone.  They work as daigou’s.  People in the daigou's social circle can view the products and place orders by forwarding a message to the diagou using the app.  Often, purchasers pay for the items through Alipay or some other form of virtual wallet (think Apple Pay but Alibaba branded).  

Some daigou's have the ability to carry the items they've sold through customs.  You'll see hundreds of daigou's at the Shenzhen and Hong Kong border.  Follow the link to see a YouTube video about the border.  Whenever I arrive at Beijing Capital Airport, I rarely see anyone go through the line to declare items at customs.  Even individual travelers with five or six suitcases go through the "nothing to declare" line without a problem.  It's painfully obvious that these people are daigou's returning to China with items purchased abroad.  

This watch likely
comes with at least
a 50% markup in
China

So why don't customs officials stop them and make them pay taxes on the suitcases full of items they've purchased for resale?  There's a lot of speculation about why the Chinese government turns a blind eye to daigou's.  I think it's because it allows overseas Chinese to generate wealth without having them interact with us "natives."  Feel free to speculate in the comments below....

https://www.youtube.com/watch?v=YQm5FZMforg

http://www.scmp.com/news/china/policies-politics/article/2121377/china-cuts-import-tariffs-range-consumer-goods

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11979837