Parallel trading, as small-scale smuggling and customs evasion is quaintly termed these days, has a history in Hong Kong that stretches back to before it was established as a colony. Consumer demand from the mainland for manufactured or processed items has always outstripped Hong Kong's capacity to supply those goods by legitimate means. Unadulterated baby formula is merely one recent example.
Two factors, closely interlinked, caused Hong Kong to become (and, once established, remain) a smuggling entrepot. One was its separate customs status. When Hong Kong was established, in 1841, it was as a "free port"; and free ports, by definition, levy the absolute minimum by way of customs duty and excise on imports. A completely different, and significantly less demanding, tariff and customs regime to that of the mainland (whether under Manchu, Nationalist or Communist administration) meant that, historically, most goods were available here at prices far lower than those being charged over the border.
That arrangement simply enhanced companies' profit margins - and it was easy for a firm (or its agents) to hide con-traband if it was also involved in the legitimate importation of the same items. Sugar processed in Hong Kong, to take one example, was a major product smuggled into Guangdong (and known wryly as "smokeless sugar") in the 1930s. Mok Kong-sang, the Butterfield & Swire comprador, was a major player in this notorious scam. He bought consignments of refined white sugar (manufactured in Hong Kong by Taikoo) on his own account and clandestinely moved it into the mainland (with other industry players) at an enormous profit.
Porous borders also helped. Until 1950, there was no immigration control of any kind from the mainland into Hong Kong. Free movement of small craft from all parts of the Pearl River Delta through Hong Kong was a daily occurrence. Extensive coastline and mountainous terrain offered considerable scope for the discreet storage and clandestine transport of what in other circumstances would be bonded goods.
When official corruption is frowned upon (even if it's commonplace), smuggling and customs evasion are also public-ally discouraged. But in societies where senior officials are universally assumed to have their fingers in the till, the average person sees nothing remiss in helping himself to a few fallen crumbs from the table. Combine that with a cultural attitude in Hong Kong which, broadly speaking, corresponds to that of the three wise monkeys ("see nothing, hear nothing, say nothing") and you find that obviously illegal activities frequently pass unnoticed in plain sight.
And yes, they still do. That Sheung Shui's blatant break-bulk smuggling operations could have gone on for so long with officialdom on both sides of the border looking the other way defies any other reasonable explanation.
When social instability becomes a threat, officialdom finally acts, however, and convenient-sounding smokescreens (such as the looming danger posed by traders on overcrowded railway station platforms) are quickly found to enforce the law.
With ever "closer integration" between Hong Kong and the mainland, the gradual but nevertheless perceptible reduction of close border controls and the steady removal of custom checks and other administrative protocols that militated against smuggling, parallel trading is only likely to increase in the years to come.