The Economist – Wine and milk, it really should go without saying, do not mix. These days bountiful supplies of both are sloshing about in Hong Kong, a special administrative region which enjoys lean rates of taxation on its imported goods. Only a few months ago however the public was outraged to learn that it faced a shortage of its infants’ favourite brands of baby-milk formula. Too much of the stuff was coursing straight through Hong Kong into mainland China, leaving locals with too little to buy. The territory’s government responded by slapping restrictions on exports of milk powder, to stanch the flow: people leaving Hong Kong could not carry more than 1.8 kg of the stuff. By July the crisis was over and a committee formed to consider lifting the ban by October.
Now it might be the turn for wealthy Chinese with a taste for fine wine to start feeling worried. Hong Kong is not yet bothered by the trade, but officials in the mainland seem to be. Supping wine has become more fashionable than guzzling traditional grain liquor, for the mainland Chinese who can afford it. But even the rich are keen to avoid the 48% tax that customs officials slap on imported wine. A case of Château Lafite bought duty-free in Hong Kong and undeclared on arrival in the rest of China can save them as much as 3,000 yuan (nearly $500) off retail. In the same stroke buyers in Hong Kong also improve their chances of avoiding the purchase of fake wine (plonk passed off as fine wine with the aid of doctored labels and reused bottles). Some people think that counterfeit tipple accounts for almost a third of the wine in circulation in China.
There is a parallel in what is called the “parallel trade” in milk. In 2008 tainted supplies of milk powder in the mainland boosted demand for formula imported from abroad, which is more cheaply and surely purchased in Hong Kong than anywhere in China. Since then there have been sporadic shortages of the stuff in Hong Kong, where many millions of Chinese from around the country come to do their high-end shopping each year. The restrictions imposed in March 2013 were supposed to prevent travellers leaving Hong Kong from carrying more than two tins across the border in any given day. Hong Kong had to pacify its local customers, who have their own babies to feed. Those customers, and their merchants too, had grown angry about rogue traders buying duty-free stock in Hong Kong to resell at a profit on the mainland.
The demand for Hong Kong’s wine supply is relatively elastic. The wine that Chinese travellers buy in Hong Kong has already come to make up a significant slice of the country’s grey market for the stuff. Last year Christie’s, an auction house, reported a threefold increase in its Hong Kong sales of Burgundy; most of those cases are bound for the mainland. Allen Zhang, a resident of Shanghai, used to buy expensive bottles of wine in Hong Kong every time he visited the territory, but he has since stopped. He finds that bringing undeclared bottles back home has become “too risky”. So some reckon that better enforcement of the current system will work in Hong Kong consumers’ favour. Speaking to Decanter China, a specialist magazine, Don St Pierre, the chairman of ASC Fine Wines (one of China’s biggest wine importers and distributors) has suggested that a crackdown on smuggling would depress world wine prices. “If [mainland] consumers are going to pay the full tax on their wines, the initial cost of that wine will have to be brought down, as they will not be willing to bear a huge rise.”
Mike Rowse, a consultant and former director of InvestHK, says he spies trouble. He thinks the restriction on milk-powder purchases was an ominous sign: that the city might be losing its independence from the chaotic power of mainland China and with that its distinctive status as a free port. Health scares, high tariffs and erratic enforcement efforts on the other side of the border, yoked to the gargantuan demand of the Chinese consumer, might come to overpower Hong Kong’s commitment to the vagaries of the marketplace.
Fongyee Walker and Edward Ragg, the owners of Dragon Phoenix Wine Consulting in Beijing, think that any regulation of Hong Kong’s wine exports is still a long way off. This despite the fact that private smuggling is still very common, they say. Travellers know that most customs officials lack the knowledge to judge the value of bottles correctly, says Mr Walker. Wine-drinking is still a relatively new trend in China’s big cities, and has yet to reach small towns and the countryside. But Mr Ragg thinks the mainland could soon become more vigilant. Customs officials have begun carrying charts listing top-selling wines and their values.