For over two decades, Chinese leaders have sought to rebalance their economy away from dependence on investment and exports and towards growth based on domestic consumption. In that context, few developments could have been more propitious than the explosive growth in internet commerce. While the benefits for consumers are obvious, digital marketplaces also allowed small manufacturers to proffer their wares nationwide. These “Taobao Villages” promise to alleviate China’s stubborn rural-urban inequality in the bargain. Lizhi Liu’s new book From Click to Boom explains the origins and effects of China’s vast e-commerce sector, while shedding light on its heretofore ambiguous relationship with the authorities.
Liu starts by reviewing how insecure property rights and inconsistent contract enforcement inhibited China’s transition to a consumer economy. For all its success since Reform and Opening, neither informal social connections nor the delegation of authority to provinces delivered China a national market based on impersonal exchange. But how to establish a reliable judiciary without compromising the Party’s authority? Liu identifies institutional outsourcing to “private regulatory intermediaries” as the solution.
State outsourcing differs from both formal delegation and simply looking the other way. Rather, by allowing platforms to regulate horizontal relationships between buyers and sellers, the Chinese government midwifed a successful market that did not impinge on the vertical relationship between the state and people. Per Liu, online marketplaces have the incentive and capacity to provide an environment conducive to trade: they must balance the needs of shoppers and vendors alike, while the combination of network effects and near-zero marginal costs encourages them to go nation-wide. And although a vast private conglomerate in some sectors might have risked a power base outside the Party, few could forget the government’s limited willingness to brook criticism, as Jack Ma had in October of 2020.
Sites like Alibaba began as platforms for international business-to-business sales, but eBay’s market entry spurred the establishment of domestic ventures like Taobao. Their experience with online wholesale prepared them to solve three problems that had prevented the sale of consumer goods at scale. First, they enforced contracts via Alipay’s mandatory escrow system that only released payments once both parties consented. Next, they kept fraud down by administering a public rating system assisted by big data algorithms. Last, they relied on volunteer online juries to adjudicate disputes.
Recognizing an enormous market without established payers, Taobao and its peers transformed Chinese e-commerce into an outlier in both absolute and relative terms. Black Friday in the US hardly bears comparison to the frenzy of consumption on Singles Day. Alibaba’s list of demands for participation in the Rural Taobao Project echoed Amazon’s HQ2 competition; in both cases the company invested only after municipalities built out infrastructure and offered subsidies. E-commerce sites have even begun to take market share in the commercial lending space by offering loans to vendors. But could this growth lead to political change? Here Liu’s dispassionate approach tempers expectations.
Equity, employees, and revenues all incentivize cooperation, not conflict, between government and the private sector. Libertarians might argue that corporations exist to generate profits for shareholders, but in China that often means the state. Likewise, an emerging regulator-lobbyist-executive “revolving door” ensures coordination, not independence. Liu provides example after example of private companies improving government services: monitoring pollution, building digital currencies, fighting counterfeiting, and much else, besides. While they disrupted traditional retail, e-commerce firms have a vested interest in their society’s continued stability.
The book also belies much of the rhetoric surrounding Taobao Villages by quantifying internet retail’s limited effect on consumers and small businesses in China’s rural hinterland. In a chapter she originally co-authored for a top economics journal, Liu details how a controlled trial randomly assigned 60 villages a logistical hub and Taobao terminal, with 40 control villages held out for comparison. Results were underwhelming, with 14 percent uptake on the consumer side and scant reaction from local brick-and-mortar retailers or local producers. It seems that the entrepreneurs and workers powering Taobao Villages must emerge organically; they do not replicate on demand. While the vast number of hamlets still makes for a large market in absolute terms, the primary impact of e-commerce should continue to land in China’s cities.
Lastly, Liu elucidates the government’s crackdown on tech firms engaged in e-commerce, ride-hailing, meal-delivery, and gaming that began in late 2020. Internet-based firms had gorged on consumer data that enabled individual-level price discrimination, then sold that data to brokers who often facilitated fraud. Large firms also engaged in more traditional malfeasance like restricting competition across sites and plain bribery of Alibaba employees in exchange for deleting negative reviews. Heady success distracted them from the hard reality that excesses in emerging industries invites new regulations. After Ma’s speech, the government asserted its prerogative. When a barrage of new antitrust and consumer protection policies took hold, firms cut hiring and investment. The markets lost over $1 trillion in equity. Having made its point, the state discovered anew the virtues of big business in 20232.
This book eschews simple answers, opting instead to explain the trade-offs and dilemmas inherent to markets: antitrust measures may enhance competition but risk stifling investment, platforms can enforce rules only to see them gamed, people object to their personal data being sold but continue to provide it. Liu spent a decade amassing evidence on her subject, then warns readers to remain cautious about statistical assumptions, sources of survey bias, and inferring causality from correlation. Again and again, this book undermines trite Western teleology about free markets hastening political reform.
This reviewer fears that most of the people eager to understand the more technical sections will have done so by reading Liu’s original journal articles, while casual readers might balk at the econometrics and lengthy appendices. One wishes she tarried longer with the 15-year-old CEO who built a 100 million RMB business, or the villagers who transitioned from making caskets to selling furniture online. Liu attended a class at “Taobao University” where private-sector employees lectured Communist officials on how best to support the market, a setting so suffused with irony it merited a chapter of its own.
From Click to Boom combines political science with econometrics to address the most pressing question facing Asia today: can the CCP keep its hold on power while continuing to deliver economic growth? Anyone wondering if the answer might be “yes” would do well to start with Liu.
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