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A team of New York Times reporters traces an underground trade route — in the nick of time

Inside Beijing’s gray market. Photo: Dan Butterfield

Nick Bilton got this one in just under the wire.

Bilton, the lead tech writer for the Times‘ Bits Blog, has a fascinating piece on the front page of Thursday’s paper that couldn’t hold much longer.

With the help of three other reporters, he tells the story of how iPhone 4s manufactured in China and sold in New York City had been making their way back to China’s busy gray market. The trade worked like this:

  • Chinese customers lined up early in the morning outside Apple stores to buy two contract-free iPhone 4s for $600 each, often paying with $100 bills.
  • They sold the phones to middlemen in Chinatown’s electronics stores for $750 each, clearing $300 for a few hours work.
  • The phones were smuggled into China — hidden in bags, taped to bodies or packed in containers.
  • They were gobbled up by China’s growing — and increasingly status conscious — middle class for up to $1,000 each.

Apple (AAPL) tried to crack down on the trade, limiting sales to two per customer and, before New York’s attorney general put a stop to it, allegedly refusing to sell to certain Asian customers.

But on Saturday, Apple will choke off the underground trade the free-market way: by selling iPhone 4s in Beijing and Shanghai for 4,999 yuan ($728.46) for the 16GB model and 5,999 yuan ($874.18) for 32GB.

According to Bilton, the price of smuggled phones has already started to fall.

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[Follow Philip Elmer-DeWitt on Twitter @philiped]