The rise of e-commerce giants such as Taobao and JD.com has, over the past two decades, not only transformed the Chinese economy but also profoundly reshaped state–business relations. It helped shift an economy once driven by investment and exports toward domestic consumption. In their ascent to influence and power, private firms also began to shoulder quasi-governmental functions.
That an authoritarian government allowed the growth of such a powerful private sector for so long is puzzling. Dr. Lizhi Liu argues that the e-commerce sector reveals two features of Chinese governance, which she terms “institutional outsourcing” and “strategic nonregulation.” She further shows how China’s digital market sheds light on the country’s political economy. As Dr. Liu observes, “For private businesses, the most valuable role of local governments may not have been active support, but rather inaction that created space for markets to grow. This echoes a key Taoist idea of non-doing (无为): at times, ‘practice non-doing, and everything will fall into place.’”
Lizhi Liu is an assistant professor at Georgetown University’s McDonough School of Business and the author of the award-winning book From Click to Boom: The Political Economy of E-commerce in China (Princeton University Press, 2024). Her research on the politics of trade and technology has earned multiple awards and funding from institutions including the Gates Foundation. Her most recent work analyzes the revitalization of China’s pearl industry.
Alice Liu: Professor Liu, could you introduce From Click to Boom to our readers? What’s the book’s core argument?
Lizhi Liu: This book examines the amazing rise of China’s e-commerce market, which is now the world’s largest, with over 800 million users and annual sales exceeding 2 trillion dollars. This market development is remarkable for two reasons: it emerged largely from scratch in China, and few observers expected it. In hindsight, it is very easy to assume that Chinese e-commerce was bound to emerge or that it is simply the byproduct of the country’s large population. But in reality, it was extraordinarily difficult for such a market to take shape.
As China sought to shift from an export- and investment-driven economy to one that was stimulated by domestic consumption, e-commerce propelled that transition. Even more importantly, the rise of e-commerce is closely tied to China’s institutional development and governance style. The rise of powerful private platform companies marks a divergence from the country’s past, when state-owned enterprises dominated. The Chinese government exercised considerable caution toward e-commerce and adopted an arguably tolerant attitude toward these private platforms, not imposing harsh regulation on them until years later. This reflects a broader regulatory principle the state adopts towards new industries: “development first, regulation later” (先发展, 再监管).
Additionally, the story of Chinese e-commerce offers a useful lens for understanding the situations of other developing countries, where governments are constrained by limited resources or political barriers that make it hard to establish rule of law and market order. I offer that digital platforms can fill the gap. Even when formal institutions struggle to supply governance, the state can leverage the power of digital platforms as a substitute to establish viable markets.
AL: How did you do your research?
LL: I conducted extensive fieldwork between 2013 and 2017, traveling to six provinces in China as well as Beijing and Shanghai. I interviewed platform employees, online sellers in both urban and rural areas, including remote villages, and local officials I met at industry events. I also conducted online ethnography of WeChat group chats that included sellers, platform employees, and local officials, in which they often discussed policy changes and industry trends.
On the quantitative side, I draw on original and firsthand data, which were rarely publicly available and quite difficult to obtain. I conducted online surveys of sellers and collaborated with Alibaba to carry out a randomized experiment in three provinces of China. We randomized e-commerce access across 100 villages in China to evaluate its effects on household welfare.
AL: Your introduction highlights China’s e-commerce boom as a paradoxical market, one that took off despite weak formal institutions. What prompted you to investigate this paradox?
LL: The paradox can be captured by a simple question: why did Chinese consumers trust this market? Initially, I had planned to study other aspects of e-commerce, but my thesis advisor asked, “Why did people even trust it?” I realized that this was the crux of the matter.
Twenty years ago, China did not have strong rule-of-law institutions in the market. Counterfeiting was widespread, and enforcement against it was lax. It was extremely common to buy something and get a knock-off, and this phenomenon arguably persists right up to the present. Another issue was that Internet penetration was relatively low back then, and credit card usage was extremely limited, under 10 percent at the time.
China’s situation stands in sharp contrast with Western markets, where online trust is facilitated by strong legal institutions. What’s more, private mechanisms such as credit cards allow consumers to dispute online transactions and easily get refunds when they are unhappy with purchases. In China, those protections were largely absent. At the same time, e-commerce necessitates a high level of trust. Unlike face-to-face shopping, consumers cannot inspect products beforehand and must wait for delivery. For such a market to function, strong institutions are needed to enforce contracts and resolve disputes between sellers and buyers.
That’s where the situation becomes paradoxical. Compared with Western countries, China had considerably weaker formal institutions, yet its e-commerce market leapfrogged advanced Western economies, developing more rapidly and at a larger scale. Thus, our key question became: if the government was not providing the trust and enforcement needed to sustain impersonal online trade, who was?
My answer is that Chinese e-commerce reflects a new governance model, which I call institutional outsourcing. The strong institutions underlying China’s online market were first developed and experimented with by private tech companies. Because state enforcement was weak, platforms had to step in and build robust private mechanisms to generate trust, sometimes even stronger than those in Western markets.
The government largely tolerated these private innovations, even though they disrupted traditional retail businesses and other segments of the economy. Once these private institutions proved effective, the state began collaborating with these platforms. Institutional development occurred through outsourcing; the government delegated parts of institutional building and enforcement to private digital platforms.
AL: You suggest that e-commerce development was not hindered by China’s weaker rule of law but to some extent facilitated by it. How can that be? Can you unpack this seemingly counterintuitive idea?
LL: In some ways, weak governmental institutions helped the rise of China’s e-commerce market. Because government-provided institutions were weak and problems like counterfeiting were rampant, Chinese consumers initially had difficulty trusting online commerce. That incentivized platforms to compensate for the lack of strong institutions by developing much stronger private alternatives.
A key example is Alipay. It was not simply a version of PayPal; PayPal didn’t work well in the Chinese setting. When Taobao first emerged, although both sides had the intention to trade, the process often stalled at the question of “who should make the first move?” Buyers feared that if they paid first, the seller might not ship the goods; sellers feared that if they shipped first, the buyer might not pay. Everyone was afraid of being cheated, and no one was willing to trust the other first.
To address this trust issue, Alipay was launched. The app combined online payment with an escrow system, a simple mechanism that greatly facilitated trust between buyers and sellers. It holds the buyer’s payment and releases the money to the seller only after the buyer acknowledges receipt of the product and indicates satisfaction with the purchase. If either party raises a complaint, Alipay temporarily suspends the funds as the dispute is investigated.
Platforms also came up with semi-democratic governance mechanisms, for example, user-based voting and dispute resolution systems. For example, disputes between consumers and sellers can be submitted to online “juries” made up of ordinary platform users, and they vote on the outcome. It is very interesting that while Chinese citizens cannot vote in the political system, they can vote on digital platforms on certain aspects of platform governance.
There is also an infrastructure dimension to it. In America and European countries, in-person retail options are already well developed and convenient enough. In contrast, China’s offline retail infrastructure is significantly less developed, making consumers more willing to try online channels.
Similarly, because of limited credit card usage among the population, China was able to skip the credit card phase altogether and hop directly to cardless mobile wallets. In the United States, though, Apple Pay never fully replaced credit cards because consumers were already accustomed to the system of credit cards. In many other developing countries, weaker preexisting infrastructure has enabled this kind of leapfrogging to the next phase. Paradoxically, infrastructural weaknesses created demand for more user-oriented private services, driving the rise of e-commerce.
AL: Thank you. Regarding the idea of institutional outsourcing, could you briefly explain how it works in China? How do you define private regulatory intermediaries? What role do they play?
LL: By institutional outsourcing, I mean the process through which the state delegates part of its governance functions to private platforms. It’s not limited to regulating the e-commerce market but has expanded across multiple sectors.
Outsourcing can take an explicit, contract-based form, which I call de jure outsourcing. Here the government explicitly assigns functions to platforms. For instance, the police department once collaborated with tech companies like Alibaba, jointly developing an app to combat online scams. China’s Anti-Corruption Bureau has signed memoranda with Alibaba to monitor suspicious transactions such as commercial bribery and money laundering. If people try to move funds by making large purchases online, platforms can restrict those activities.
Collaborations also emerge in areas such as employment and public services. Technology firms have launched programs to support job placement for university graduates, and during COVID-19, companies developed contact tracing apps that assisted local governments with smart city initiatives.
A less visible form of outsourcing is de facto outsourcing, and it’s very important in the Chinese context. In these cases, the government does not explicitly delegate responsibilities but permits and even encourages platforms to experiment with governance innovations without early intervention. The state refrains from shutting down or tightly regulating new institutional mechanisms, even when they are potentially disruptive.
Back to our example of Alipay. To address the trust problem in online transactions, Alibaba introduced this service that combined digital payments with a mandatory escrow function. A surprising anecdote is that when it was launched, Alipay’s legal status was ambiguous. At the time, only state-owned banks were authorized to provide such financial services, and violations involved high risks. To the extent that Jack Ma himself had to assure his employees that if someone needed to go to jail for Alipay, he would be the one, not the employee who launched it. Eight years later, after Alipay had already scaled, the government legalized third-party, non-bank payment systems.
Similarly, many Chinese tech firms adopted the VIE (variable interest entity) structure to circumvent restrictions on foreign investment in strategic sectors such as telecom. The government was aware of this practice but chose not to intervene for years. Even without explicit approval, the state refrained from early intervention and permitted private firms to shape institutional arrangements, undertake rulemaking, and support market development.
AL: Regarding this outsourcing approach, did the government not anticipate risks associated with it?
LL: Yes, I think the government must have been aware of several risks. One example concerns online payment systems. As mobile payments became commonplace in China, many people began storing money in digital wallets such as WeChat Pay or Alipay. Over time, these fintech platforms began to function as quasi-banks. They are not certified banks per se, but they started to offer bank-like services. For example, users could store money in their wallets and receive returns on those funds, no different from a money market product.
In most cases, the interest rates offered by these platforms were even higher than those provided by state-owned banks. Consequently, huge chunks of money began flowing from traditional state-owned banks into these private tech platforms, even though the platforms were not regulated in the way a bank would be. Traditional banks took note of this risk very early on, around 2010. However, the central government was relatively tolerant at the time, partly wishing that competition from internet companies would pressure traditional banks to reform.
It also created macroeconomic risks. The rise of online markets led to a large wave of closures of brick-and-mortar stores, leading many to temporarily lose their jobs. This sparked a huge debate in China about whether e-commerce represented the “real economy” or a “virtual economy.” Critics held that e-commerce did not actually create value but simply took business away from physical retailers and manufacturers.
Many traditional manufacturers and distributors felt disrupted, if not hurt, by the new system. Previously, products were sold through authorized distribution networks. But with the advent of online marketplaces, unauthorized sellers sprang up, and so did counterfeit goods. Not surprisingly, this created significant challenges for established supply chains.
Despite these oppositions, the Chinese government sided with the e-commerce sector. This is because policymakers believed that China needed to transition toward a domestic-consumption-driven economy by encouraging entrepreneurship. E-commerce enables individuals to easily start businesses, since opening an online store requires much less starting capital. Additionally, it created many jobs and stimulated domestic consumption.
The government tolerated these risks also because it believed it retained ultimate control over the internet. Legally and technically, the Chinese government can regulate or even shut down internet services. Because of this, policymakers were convinced that while risks existed, they were manageable. As a result, they allowed the sector to grow and chose not to intervene in the early stages.
AL: How has e-commerce affected the relationships among different state actors, including the central government, local governments, and private merchants?
LL: We first need to look at how China’s economy was organized before the rise of e-commerce. China’s governance structure can be described as a blend of economic decentralization and political centralization. Outside observers unfamiliar with China tend to assume that the central government micromanages everything while local governments merely implement policies accordingly. In reality, economic policymaking in China has long been highly decentralized.
Typically, the central government provides a very broad policy direction, but it’s up to the local governments to design detailed policies tailored to local conditions and resources. Local governments exercise significant autonomy in both policy design and regulating businesses within their jurisdictions. Oftentimes the central government, facing information asymmetries, cannot fully monitor what local governments are doing.
Prior to the rise of e-commerce, local governments played a crucial role. For their businesses to fare well, private owners often had to maintain good relationships with local officials, as local governments controlled key resources, including permits, credit access, and taxation. Yet during my fieldwork I observed that most online merchants had little to no interaction with local governments. This is because sellers didn’t need official licensing from the local government for their businesses. They only had to use their national ID to register on an online platform. Many ran their businesses from home, making it difficult for local governments to track what they sold.
The rise of e-commerce therefore reduced private merchants’ dependence on local governments. Once businesses moved from offline markets to online platforms, they were no longer constrained by locally controlled resources or local marketplace boundaries, selling instead to customers across the country.
This shift to the digital economy created new regulatory difficulties. In the past, transactions were largely local and therefore easy for governments to track. With the rise of e-commerce, transactions occur across regions frequently, making it difficult for any single local authority to handle disputes or enforce rules. Effective governance requires coordination across jurisdictions and a centralized mechanism, something local governments have thus far struggled to provide.
The rise of online platforms enabled the central government to obtain more information about local authorities, shifting the central–local balance of power in its favor. My research shows that national platforms possess substantial bargaining power vis-à-vis local governments, as they can exploit interjurisdictional competition to gain leverage. However, there is only one central government. This asymmetry allows the center to harness platforms as powerful instruments across multiple domains, including legal enforcement, political control, and governance delivery. In this sense, e-commerce has contributed to the consolidation of central authority within an economic system long characterized by pronounced economic decentralization.
AL: I see. In terms of China’s regulatory stance toward e-commerce, you divide it into a pre-2020 era and the three-year crackdown that followed. What change triggered this sharp shift? What pressured China to tighten its grip?
LL: There has been ample speculation and various explanations. While it’s hard to pinpoint a single trigger for the sudden shift, my book highlights several structural reasons that help explain why the government eventually tightened control.
Even before 2020, people working in the digital economy expected regulation to eventually kick in. As the market expanded, several structural problems also emerged. For example, there were growing concerns about data security and privacy. Personal data leaks were common, and it became extremely cheap to purchase someone’s personal information online. There were also issues of cutthroat competition between platforms.
Consumers also complained about algorithmic price discrimination. Essentially, if the algorithm detects that a user frequents certain services, the platform may charge that user higher prices. In addition, because many online sellers were not formally registered and thus outside the regulatory purview, there was widespread tax evasion in the e-commerce sector. Due to all these problems, most people in the industry generally expected an eventual crackdown.
But as to why that specific timing, my ultimate explanation is that the context of 2020 encouraged overconfidence on both sides. The tech industry was extremely optimistic at that time. Ant Financial was preparing for what would likely have been the largest IPO in history. Chinese tech firms weren’t just rapidly catching up with major Silicon Valley counterparts; many were convinced that companies like Alibaba and Tencent could even surpass their American counterparts. This optimism may have led some technology leaders to expect the government to continue its tolerance of the sector, which had been sustained for nearly two decades.
At the same time, the Chinese government was also somewhat overconfident. China had just emerged from the first wave of COVID-19 while most other countries were still struggling, which greatly boosted the leadership’s confidence in its capacity to manage major challenges. With the pandemic under control domestically, the state turned its attention to the tech sector. As a result, a series of strong regulations were introduced, particularly during the summer of 2021. These measures proved damaging, wiping out gains and taking a toll on the market value of many tech companies. The effects of that campaign on the whole sector are still being felt today.
AL: Now let’s talk about the relatively tolerant twenty years before the crackdown. Why was that the case? Given the authoritarian nature of the Chinese government, surely this is surprising to many Western observers.
LL: Before my fieldwork, I also assumed that because China is an authoritarian regime, government officials should be highly controlling. But what I came to realize is that outside observers often focus too much on what the government does when it regulates or intervenes and pay far less attention to the fact that the government often has the capacity to intervene much earlier but chooses not to.
On many occasions, the state deliberately refrains from regulation despite having the power to do so. I refer to this as strategic non-regulation. The government may recognize growing problems in a sector and still decide not to intervene because it sees growth potential and wants to allow the industry to develop.
Some research shows that in China, in times of economic difficulty, enforcement of environmental regulations weakens. In other words, pollution increases when economic conditions worsen because local governments prioritize growth over environmental protection. As you see, regulatory enforcement can be adjusted depending on economic priorities. The Chinese government can be tolerant of the private sector so long as it feels that businesses are creating jobs and growth.
I observed this dynamic during my fieldwork. In one village where online commerce was rapidly developing, many farmers had constructed illegal extensions to their homes to use as warehouses. Neighboring villages had similar constructions but used the extensions for purposes other than e-commerce. When the time came for local authorities to enforce regulations against illegal buildings, they demolished the structures in the surrounding villages but left those in the e-commerce village untouched. By choosing not to enforce the rules, local officials effectively supported the emerging industry.
The same logic applied to taxation. As I said, most e-commerce sellers were either evading taxes or only paying symbolic amounts. Officials knew this, but they often turned a blind eye because they believed the sector would create jobs and help local economic development. As one merchant I interviewed said, “No regulation is the best support. (不管就是最大的扶持).”
That’s why, when studying China, it is important to pay attention not only to what the government does but also to what it chooses not to do. Scholars often focus on regulatory actions because they are visible. Yet in an authoritarian context like China, where state intervention can be extensive and relatively unconstrained, strategic non-regulation may be equally, if not more, consequential for many private firms, as it preserves space for market autonomy.
AL: Let’s zoom out a bit. More broadly, how does your study of e-commerce help us understand China’s political and economic system?
LL: One key point is that China has been trying to shift from an investment- and export-driven economy toward one that relies more on domestic consumption and entrepreneurship. To be honest, this transition has been less than successful for various domestic and international reasons, and the Chinese economy has struggled in recent years. But the leadership still recognizes the importance of strengthening the domestic sector, because consumption proves to be a more stable source of economic growth. It has been tolerant of sectors that support this transition, including e-commerce. This helps explain why regulation remained light for roughly twenty years: the e-commerce sector aligned with China’s broader development strategy.
A second pattern is the blurring of boundaries between the state and private businesses. Traditionally, state-owned enterprises played a central role in China’s governance. When the government wished to develop underdeveloped regions, for example, it was often SOEs that entered first, shouldering development tasks on behalf of the state before private businesses followed.
With the rise of digital platforms, however, private technology firms increasingly perform tasks traditionally assigned to SOEs. This development suggests that there is rising heterogeneity within China’s private sector; large platform companies now operate very differently from ordinary private firms. They increasingly serve as instruments through which the government implements administrative functions, at least domestically.
Since the book was published, I have spoken with multiple scholars in China who argue that institutional outsourcing has become even more prominent after the tech crackdown. The government has recognized the usefulness of delegating certain functions to digital platforms. The result is increasing integration between public regulatory authority and private platforms. In other words, major platform companies have become important providers of governance and key enforcers of state rules.
When I first introduced the idea of institutional outsourcing seven or eight years ago, some scholars were skeptical. At the time many of these collaborations were not readily visible. Today, however, the topic has become much more widely discussed, especially among legal scholars in China, and there is growing consensus that the government relies heavily on private firms.
Finally, this research changes how we think about China’s internet. Ten years ago, most discussions of the Chinese internet revolved almost entirely around censorship and political control. Those aspects remain important, but the internet’s economic functions merit attention. Censorship indirectly shielded domestic firms from foreign competition, allowing them to grow.
AL: What do you see as the future of China’s e-commerce industry? Looking ahead, do you expect digital platforms to become more autonomous, or will the state reassert tighter control?
LL: The biggest developments in this sector are likely to occur internationally rather than domestically. China’s e-commerce industry is profoundly reshaping its export model. With the rise of cross-border e-commerce platforms such as Temu, Shein, AliExpress, and TikTok Shop, e-commerce is becoming a major driver of Chinese exports. In the past, Chinese exports moved through traditional supply chains: Chinese manufacturers sold products to wholesalers in the United States or other Western countries, who then resold the goods to consumers.
With cross-border e-commerce, however, consumers in the United States or elsewhere can now purchase products directly from small suppliers in China through online platforms. In these cross-border transactions, the institutions governing trade are often even weaker. Accordingly, platforms will play an increasingly important role in providing governance, such as dispute resolution and quality control. At the same time, these platforms will likely face growing regulatory pressure from host countries, such as the United States.
Domestically, the regulatory environment has also somewhat relaxed. As I mentioned earlier, there was a significant regulatory crackdown on digital platforms between late 2020 and mid-2023. Policymakers eventually realized that heavy regulation harmed many small businesses that depend on these platforms. Given that the internet economy is one of China’s most competitive sectors, heavy-handed regulation also undermined overall market confidence, especially among foreign investors. For that reason, the government has eased its regulatory pressure and has once again encouraged platforms to invest, innovate, and support economic growth. Even so, firms remain cautious because the earlier crackdown was so intense. While the regulatory environment is unlikely to return fully to its pre-2020 level of leniency, future regulation of e-commerce and digital platforms is likely to be more measured and calibrated.