How did China’s e-commerce model become the best in the world?

Just how did China's e-commerce market become so sophisticated, and what lies in its future? A new book by Lizhi Liu looks for answers

It’s safe to say that many are amazed (and rather jealous) of the apparent success of China’s e-commerce market and the internet businesses that thrive within it. But how did they do it?

New book From Click to Boom (Princeton University Press, 2024) asks that very question – how did the world’s largest e-commerce market highlight a digital path to development? Paul French caught up with its author, Lizhi Liu, an assistant professor at the McDonough School of Business at Georgetown University in Washington DC, to discuss potential answers.

We’re all amazed at the size and rapid growth of China’s e-commerce market – can you tell us just how big and all-encompassing this market truly is?

It’s the world’s largest e-commerce market, with over 800 million users, a 40% share of global transactions, and retail e-commerce sales surpassing US$2 trillion. To put this into perspective, during China’s 2020 Singles’ Day shopping event (akin to Cyber Monday), an astonishing four billion parcels were generated – enough to circle the Earth at the equator roughly thirty times if placed end to end. (It is noted that caution is needed when interpreting these numbers, as some sellers inflate their sales figures to boost search rankings through fraudulent practices – a common issue globally. Despite these distortions, the scale and popularity of China’s e-commerce market remain unmatched.)

The market also offers far greater product variety compared to its Western counterparts. Chinese consumers often refer to it as an ‘omnipotent market,’ where ‘there’s nothing you can’t find, only what you haven’t imagined yet.’ Beyond everyday items like clothing and household necessities, shoppers can even purchase bad debt and court-seized assets. Some of the more unusual offerings mentioned in the book include a ‘Dog Translator’ (which claims to interpret dog sounds into human language) and a ‘Noisy-Neighbour Revenge Machine’ (a vibration motor designed to annoy an upstairs neighbour). Notably, there’s also a ceramic figurine of Donald Trump as Buddha, inscribed with the slogan ‘Make your company great again’ — a playful gift that may appeal to both Trump supporters and critics alike.

I think many think that the Beijing government fostered the development of e-commerce, but you argue that it is largely a result of just the opposite, weak government institutions – can you explain please?

We need to differentiate between government support and government institutions. While China provides strong, ad hoc support to favoured industries and firms, its government institutions – particularly legal frameworks in markets – were weak during the early stages of e-commerce. At that time, China lacked the norms and laws needed to regulate online behaviour and combat online fraud, leading to widespread distrust of e-commerce. Although the country eventually established relevant institutions (e.g., cyber courts and the E-commerce Law), these government institutions are largely the consequence of e-commerce development rather than its cause.

The weak government institutions, however, prompted e-commerce platforms to create effective private online institutions. Platforms had to innovate and build strong institutions to bridge the governance gap and build consumer trust. For example, Taobao, China’s largest e-commerce marketplace, introduced a payment-escrow system, return-freight insurance, a credit scoring system, a fraud detection program, and even a jury-like mechanism that allows users to vote on cases or change platform rules. My book examines these digital institutions and underscores their vital role in fuelling China’s e-commerce boom.

Once established, these digital institutions can also support the development of government institutions. The government has engaged with tech firms and adopted platform rules to create formal governance structures for the online market. Essentially, this is a private-public partnership in institutional building.

So many problems elsewhere with e-commerce, including here in the UK, have come down to contract enforcement, fraud detection and dispute resolution. We might imagine these would be major problems in China with the weaker institutions you suggest, yet they seem to have overcome these hurdles. How?

Yes, the issues of contract enforcement and fraud are indeed more pronounced in China than in the UK. However, backwardness can sometimes lead to leapfrog development, such as in e-commerce.

First, the UK’s well-established offline infrastructure in the 2000s – such as department stores and widespread credit card use – reduced the need for e-commerce shopping. In contrast, many less developed regions in China at the time had limited offline shopping options, leading consumers to rely more on e-commerce for greater product variety and quality.

Second, the weaker institutional framework in China has prompted Chinese platforms to create highly developed online institutions for contract enforcement, fraud detection, and dispute resolution. While platforms from the UK and US also incorporate these features, they tend to be less sophisticated. For example, eBay struggled in China in the early 2000s because it simply transplanted its US business model, failing to establish the trust necessary for Chinese consumers to engage in online trading.

Lastly, the Chinese government has played a crucial role in this evolution. As my book illustrates, the government initially acquiesced to and later partnered with platforms to build online institutions, which helped address problems of contract enforcement and fraud detection.

You do suggest it’s a fluid relationship between e-commerce entrepreneurs and the government – ‘from laissez-faire to crackdown and back to support’. What do you think is the long-term trend?

In the long run, the Chinese government is likely to continue regulating the e-commerce sector, but it will not apply the same level of intensity to the tech sector as during the crackdown phase. Given the challenges facing the Chinese economy, there is a pressing need for e-commerce platforms and technology firms to drive economic growth, job creation and China’s global competitiveness. Excessive regulation can stifle autonomy, deter innovation among entrepreneurs and limit growth potential. Currently, the Chinese government appears more cautious about regulating the tech sector, mindful of the potential impact that overly stringent regulations could have on market confidence.

Another issue with e-commerce and its regulation in the UK, Europe and North America is privacy issues and data gathering, let alone surveillance. How have these not become issues in China – or are they, but there’s just not really a framework to contest such violations?

These are also issues – and the dark side – of China’s e-commerce development (see Chapter 6 of the book). However, before 2020, these issues did not prompt strict government regulations. Government then maintained a laissez-faire approach. I call this era “strategic non regulation”: the government recognised the market’s problems but avoided heavy regulations to encourage market growth. With minimal regulations, firms faced low compliance, allowing the sector to flourish and create jobs – exactly what the government aimed for. In 2020, the government changed its policy toward tech companies (explained why in Chapter 6). Following the suspension of Ant Financial’s IPO, China entered a 2.5-year crackdown. The government quickly rolled out numerous regulations – arguably too many – to tackle issues including privacy concerns and data collection. While many of these regulations were well-intentioned and overdue, they often proved excessively strict, overly broad, and were implemented without warning. The heavy-handed enforcement approach resulted in regulatory overkill, shifting firms’ focus from “maximising revenue” to “minimising risk.” This harmed the internet industry, wiping out substantial market values.

How big is e-commerce going to get? Not just in revenue terms, but in terms of where else it could spread and to which new sectors. And what regulatory challenges to both entrepreneurs and the state might these developments bring?

China’s domestic e-commerce market is nearing saturation, particularly in urban areas where most consumers are already frequent users and have made substantial online purchases. While there is some growth potential in rural regions, lower disposable incomes present a significant challenge to driving further expansion. Domestically, China’s sluggish post-pandemic economic recovery and weakened consumer confidence have turned once avid online shoppers into more cautious spenders.

Cross-border e-commerce presents significant growth opportunities. With limited prospects in the domestic market, Chinese e-commerce sellers have increasingly turned to international markets. Chinese sellers have established a strong presence on Amazon, while Chinese-origin platforms like Shein and Temu have rapidly gained global popularity. Nevertheless, foreign regulatory risks are on the horizon. In September, the Biden administration proposed restricting the de minimis tax waiver, which allows packages under $800 to enter the US duty-free. This proposal specifically targets platforms like Shein and Temu, aiming to exclude products subject to US-China tariffs from this exemption. As cross-border e-commerce continues to grow, we can expect further regulations from foreign governments to address this rising trend.