In spite of China’s WTO entry, import tariffs into China are very high, especially compared with the developed states in Asia. For example, importing a camera into China would cost 17% VAT + approx. 10% Tariff.
Meanwhile, Hong Kong has 0% VAT and 0% Tariff for most products (except fuel, alcohol and tobacco). The problem is that the border between Hong Kong and Mainland China is a very porous one.
So while the iPhone hasn’t yet officially hit the market here in China, you can buy unlocked Hong Kong iPhones on the Shanghai Grey market for 5500 RMB (16GB) and 6300 RMB (32GB). Note that HKD is currently 1:1.13 (CYN:RMB), so you’re going to pay approximately 13% more than in China.
However, there is 17% VAT that should be added to all China Products. The Tariff shouldn’t be applicable since the phones are purchased in Hong Kong, and obviously the items are smuggled in – because there is no other way around the VAT.
Bottom line, for a 13% service charge the grey market will handle currency conversion from currency controlled Chinese Yuan into freely tradable Hong Kong dollars (itself not an easy task), smuggle the items into China, and handle the shipping charges.