On the Fringe

"Arguably, Hong Kong was built on parallel trading because we've always leveraged differences between the Mainland and us to generate business."

They're back! Once the Mainland crossing points re-opened, it didn't take long for Hong Kong's savvy parallel traders to swing into action. Likewise, Mainlanders are lining up outside luxury goods shops in Central to buy the latest LV bag or Gucci item.

But, of course, nobody is raising a hue and crying about Pedder Street's queues as the visitors swipe their credit cards. That's the acceptable face of parallel trading.

Yet further north, the grumbling is already gathering pace as the more grass-roots parallel traders reappear in Sheung Shui. The phenomenon is not new. Don't forget it played a role in the now defunct localist movement that sought to stir up anti-Mainlander sentiment.

A series of protests starting in 2011, led to near riots in 2015, with those opposing the trade scuffled with traders and their supporters. Driving the militant end of the discontent were elements intent on inciting hatred. Some of that was a foretaste of what came along in 2019. Still, genuine public disquiet at the social disturbance caused by the parallel trade existed.

In this blog post, I will sweep through the history of parallel trading in Hong Kong, mentioning the current regulations and the potential benefits and drawbacks. Finally, I'll consider possible solutions.

So what is parallel trading, and why is it a cause of concern? Parallel traders buy products in Hong Kong at lower prices and sell them in Shenzhen at higher prices. The business model is that simple. 

However, the term' parallel trading' is probably confusing the issue. What is happening is more akin to smuggling and grey trading. Thus, it's essential to distinguish between legal and illegal; parallel trading becomes unlawful if the trademark owner's consent is not given according to Section 20 of the Trade Marks Ordinance, Chapter 559, Laws of Hong Kong.

According to a Hong Kong Trade Development Council study, legal parallel trading in Hong Kong was estimated at around US$24 billion in 2020. This figure includes exports and imports of goods shipped through Hong Kong. Most of these goods are sourced from mainland China and then resold in other countries, primarily in the Asia-Pacific region.

Unfortunately, I've got no data on the value of grey trading, except to say it must be lucrative given the scale of the operations visible in Sheung Shui and elsewhere. 

While this trade existed for decades, these days, syndicates bulk buy everyday items from shops in Sheung Shui, Fanling and further afield. The articles are then broken down into individual loads and distributed to couriers, who travel across the boundary to hand over the items.

The explosion in this grey trading can be traced back to 2003 when the 'Individual Visit Scheme' was implemented, allowing multiple boundary crossings and creating the means for the trade to flourish. 

To some extent, the trade caters to a market created by the sudden appearance of Shenzhen's middle-class population by offering them cheaper genuine goods. Moreover, past shortages in the Mainland and concerns around the quality of such items as child milk powder drove demand to new heights. Hong Kong suffered as mothers here couldn't source milk powder. 

And yet, this type of trading is universal as it allows merchants to take advantage of price differences between the two markets. And, arguably, Hong Kong was built on parallel trading because we've always leveraged differences between the Mainland and us to generate business.

Hence these traders, seen by some as a blight, are the manifestations of an activity that helped make Hong Kong a success. Further, all involved are gainfully employed, making a living and not reliant on the state for benefits. If you look at the couriers, the majority are middle or old-aged, who struggle to find gainful employment elsewhere. They earn as much as HK$1000 a trip, making the work lucrative.

Parallel trading can also help manufacturers by boosting demand and increasing sales, brand recognition and profits. Yet, the impact of the trade on its host community, mainly Sheung Shui, is visible and significant. I'll get to that. 

At a more macro level, economists tell us that such grey trading can decrease the demand for goods in the domestic market, as traders can buy the goods in other jurisdictions and sell them at a lower price. As a result, this trade can lead to decreased sales for domestic companies and a drop in overall economic activity. 

Furthermore, this business can distort price signals, as the prices for goods in the domestic market may no longer reflect the actual underlying demand for the items. 

Finally, parallel trading can impact the government's ability to collect taxes on the goods purchased and sold. Yet, none of these macro factors is driving the discontent at the trade here in Hong Kong. 

For many years now, with an interlude for Covid, it is the more mundane issues of obstruction, noise, litter, and the general nuisance traders create that raised concerns. For example, at Sheung Shui Station, traders mainly gather near Exit C to exchange goods, causing a severe blockage. In response, the MTR erected barriers and gates to control the situation, with staff enforcing the rules. Alas, this led to disputes and conflict with Police reinforcements needed to restore order.

Faced with public discontent, the government sought to regulate the trade by imposing strict limits on the number of goods carried at any time. For example, limits on how much milk powder an individual may have; the law states that any person carrying more than 1.8kg of powdered formula when leaving Hong Kong may face a maximum fine of HK$500,000 and two years imprisonment. 

Nonetheless, the scale of the challenge is enormous. According to statistics from the Hong Kong Immigration Department, about 2.43 million people entered and exited through the control points from February 6th to 12th. Stopping, checking and searching even a tiny proportion of these people requires considerable time and resources.

Still, the current government's response is piecemeal, involving tweaking regulations and ad-hoc enforcement action by various agencies, including the Customs and Excise Department. 

The authorities must recognise that uncoordinated actions such as sweeps that pick up couriers and ticketing obstruction will only have a marginal impact.

Ultimately, it is perfectly possible to disrupt the trade with an intelligence-led operation coordinated across multiple agencies to tackle the money moved around. That will hurt the syndicates. 

I've heard pundits suggest that parallel trading is a tangible demonstration that 'one-country, two-systems’ remains intact. There is an element of truth in that. However, such a stance does not assuage the poor residents of Sheung Shui overwhelmed by the disruption to their community.