In a crowded multi-storeyed marketplace in downtown Shenzhen, a store owner haggles with a cigarette-smoking customer over the price for a bulk sale.

They are not bargaining over fake watches or counterfeit leather bags, but genuine Apple iPads and iPhones -- freshly smuggled from Hong Kong, a free port with zero duties for many electronics imports.

This is real stuff that just arrived. We just got these off someone's waist strap, said the storeowner, whose surname is Xu, while the customer ran his fingers through a stash of cash upon closing the deal to buy a dozen iPhone 4s.

Xu's store, with its glass display in a hall full of electronics sellers, is a far cry from Apple's signature spacious, white outlets. But iPhones and iPads are flying off the shelf, thanks to discounts on the official price tag.

With Apple's gadgets becoming a status symbol among rich Chinese, businessmen like Xu are meeting insatiable demand by smuggling from Hong Kong, where the currency is weaker than the yuan and tariffs are virtually zero.

Storeowners such as Xu take advantage of the price difference of Apple products in Hong Kong and China.

For example, an iPad 2 costs HK$3,888 ($499), or the equivalent of 3,215 yuan, in an Apple retail store in Hong Kong, but its official price in China is 3,688 yuan ($572).

Most unauthorized resellers set a price somewhere in between to attract buyers.

When customers ask us about maintenance, we just tell them, don't worry, these are all real from Hong Kong and they won't go faulty, said Xu, with about 5 iPads stacked beside him on his glass display filled with rows of phones from Nokia, Samsung Electronics and HTC.

Apple products are so popular in China that Morgan Stanley forecast its sales in the country, the world's largest mobile phone market, could exceed $9 billion in the year ending September 2012.

That will be up sharply from just $2.9 billion in the previous fiscal year.

Apple only has four official retail outlets in Beijing and Shanghai, but fake stores that look like the real thing have also sprouted across Chinese cities, such as Kunming in southwestern China.

Chinese officials in Kunming ordered two fake Apple shops to close, a local newspaper reported on Monday, an apparent reaction to a storm of media attention about an unauthorized and elaborate hoax store in the southwestern city.

The official supply in China is not sufficient yet, said Dickie Chang, a senior market analyst of research firm IDC in Hong Kong. The brand image of Apple is very good, especially in the media tablet market.


Media reports said in June customs authorities in the southern city of Shenzhen broke several smuggling rings that tried to illegally ship over 300 computers, including a large number of iPads, worth 1.5 billion yuan ($230 million).

Police arrested several ringleaders who had hoped to avoid paying 240 million yuan worth of taxes for the products, the reports said. Shenzhen authorities were unavailable for comment.

Some dealers engage so-called student mules to do the job.

These are basically Chinese students living in Shenzhen who commute daily to schools in neighboring Hong Kong to carry the Apple products across the border, while others smuggle in bigger quantities using logistics companies, industry sources said.

I used to carry one brand new iPad or iPhone when I go back to China, said Desmond, a university student from Shenzhen studying in Hong Kong, who declined to give his last name.

I'm not afraid of being caught. At most I'll just pay the taxes, let them strip off the plastic cover to convince them that it's for my own use.

Desmond said he sold some of the iPhones and iPads on China's largest online mall and earned as much as 300-400 yuan apiece.

Some students collect an iPad or iPhone a day from Hong Kong suppliers, put it in their schoolbags and pass through immigration to deliver it to stores like those in the multi-storeyed complex where Xu has set up shop, industry sources said.

Students who are willing to take a bigger chance sometimes strap several iPhones around their waists and wear an oversized jacket to escape the eyes of custom officials, they said.

A video clip clandestinely filmed by a Hong Kong newspaper tracking the entire iPad smuggling process by students is available on YouTube.

($1 = 7.791 Hong Kong Dollars)

($1 = 6.445 Chinese Yuan)

(Additional reporting by Xavier Ng and Zhang Yan; Editing by Jacqueline Wong and Sugita Katyal)