DIGITAL PLATFORMS: THE CHINESE EXPERIENCE

Part 1, reasons for rapid growth

Digital platforms are a true phenomenon. They have spread rapidly and become a norm in the daily lives of virtually all Kazakhstanis. Their explosive growth has raised concerns among the government and the expert community — how should they be measured, are there risks, and how can they be regulated and controlled? Even developed countries are still figuring out how to deal with this new phenomenon, and their level of digital penetration remains lower than in Kazakhstan.

But the same cannot be said about our neighbor — China. Just 15 years ago, China was barely present on the global map of digital services. Today, it ranks number one, with over $2 trillion in online trade, accounting for more than 50% of the global market. What we are witnessing in Kazakhstan today already happened in China 5–10 years ago.

But why China, and not the developed countries? Why did Kazakhstan follow this example? The most likely answer: digital platforms fulfill a massive covert demand for effective institutions. Last summer, we already compared digital platforms with the «exoskeleton» of the economy, compensating for institutional gaps.

To answer these questions, we reviewed Lizhi Liu’s book «From Click to Boom: The Political Economy of E-Commerce in China». In 2020, she received an award from the Society for Institutional & Organizational Economics, which brought it to our attention.

Income and productivity growth require scale of sales and complexity in production. But this inevitably requires a lot of impersonal transactions for large distances. This raises serious concerns about contract enforcement, especially in the context of information asymmetry and weak government institutions.

China and Kazakhstan shared similar characteristics. Both have large territory, ethno-linguistic fragmentation, and prolonged communist regime which undermined personal trust — through suppression of informal institutions (religion, cultural norms) and terror (snitching).

One might conclude that all that’s needed is the rule of law through political reform. But such reforms almost always fail due to elite resistance. Still, the public demand for trustworthy institutions remains — and it was partially met by private digital platforms, which filled gaps in state governance.

A vivid example is Taobao. It began by solving a simple yet critical problem: distrust between sellers and buyers. Taobao created Alipay — an escrow service that held payments until the buyer confirmed receipt of the goods. This ensured that both parties fulfilled their obligations — the «dam» of distrust was broken, triggering explosive growth in e-commerce.

Over time, digital platforms developed other tools as well — complex reputation systems, credit scores, fraud detection mechanisms, and more. In effect, they assumed the role of intermediaries — ensuring contract enforcement, preventing fraud, and resolving disputes. De facto, they replaced the functions of courts, police, and cumbersome regulators.

Why implement complex consumer protection and business support policies when civilized competition on a digital platform can achieve the same outcome?

Part 2, economic effects

At the end of 2000s, exports had ceased to be the main driver of China’s economic growth. After peaking at 36% of GDP in 2006, their share steadily declined to just 20% by 2023. New sources of growth were needed — and the domestic market became that source. Since 2010, the share of household consumption in GDP has grown from 34% to 39%, with digital platforms (DPs) playing a crucial role in this shift.

1. DPs created a unified national market — enabling a completely new scale of sales.

Despite large population, China’s economy was regionally fragmented. The costs of operating outside one’s local area were high, limiting the growth potential of local businesses. DPs provided access to much larger markets and boosted competition.

2. DPs promoted grassroots industrialization, particularly in the SME sector.

DPs assisted producers in overcoming crises of 2007–2008. When global demand for Chinese exports dropped, merchants turned to online sales. Product variety expanded in response to consumer preferences.

For example, in the village of Dongfeng, one entrepreneur started selling furniture on Taobao. His success quickly inspired others, and by 2014, Dongfeng had become an e-commerce hub: over 2,000 online stores across 1,180 households, generating more than $210 million annually. E-commerce replaced traditional trades and became the primary source of income and jobs.

3. DPs drove innovations and transformed several industries.

Consumer demand for fast delivery reshaped logistics entirely. A highly efficient transport system emerged, with smart warehouses and their technological modernization.

With access to vast amounts of data, DPs became an ideal environment for experimentation and innovation. This helped accelerate the development of technologies like big data and artificial intelligence.

4. DPs curbed inflation and improved real household incomes.

There is substantial evidence that DPs improved the well-being of rural households by reducing the cost of living. One experiment randomly granted e-commerce access to 100 villages in three provinces. The results showed that the main effect was increased purchasing power, thanks to direct access to cheaper, higher-quality, and more diverse products. We wrote about a similar pricing effect here.

5. DPs helped create a cashless economy.

The share of cashless payments skyrocketed, significantly reducing the size of the shadow economy. This even led to some amusing situations familiar to many. For example, beggars began using QR codes instead of collecting cash. In another case, thieves came to a city known for its transition to cashless payments — after a night of robbing several shops, their total "loot" amounted to just a few hundred dollars.

Part 3, complicated relations with government

China is known for its state planning, bureaucracy, and widespread interference in business. However, the 5-year plan in 2011 introduced a course toward «economic rebalancing». The goal was to move from investment and export to domestic consumption and innovations. To achieve this, China needed a unified national market with large-scale impersonal exchange that didn’t exist due to the weak rule of law. Transactions were mostly in local markets and personalized.

Those functions were «institutionally outsourced» to digital platforms. The government essentially «turned a blind eye» to their operations. This approach is known as «strategic nonregulation» — a deliberate policy of inaction aimed at supporting new industries by the rejection of excessive regulation. For nearly two decades (until 2020), Chinese authorities intentionally refrained from imposing strict rules for DPs, despite pressure from state banks and traditional businesses.

This was not a sign of state weakness. In an authoritarian regime, the authorities knew they retained ultimate control. The government could easily exert power over DPs through antitrust investigations, hefty fines, or, in extreme cases, by cutting off internet access. In wealthy democracies, DPs can maneuver between different branches of power and lobby for their interests. In China, however, final decisions are made by a small group of people. There is no system of checks and balances for the executive branch.

Economic success of DPs did not guarantee political power. Platforms in China thrived only with the state’s tacit approval — they were not regulated while they contributed to economic growth. The People’s Daily newspaper of the Chinese Communist Party sent this signal to DPs: «Don’t harbor illusions that you’re too big to fail, and don’t think you’ll control everything like the South Korean chaebols».

Everything became crystal clear after Jack Ma publicly criticized the authorities in 2020, triggering what later became known as a «regulatory storm». This campaign-style crackdown targeted all large DPs and lasted for 2.5 years. The historic IPO of Alibaba was canceled a week later, and Jack Ma disappeared from public view. The antitrust investigation against Alibaba was completed in just four months and ended with a record fine of $2.8 billion. For comparison, the antitrust case against Microsoft in the USA lasted over 10 years.

Within 2.5 years, the market value of the top tech-companies dropped by $1 trillion. Investors were alarmed by the harsh crackdown on the country’s most competitive sector. This undermined trust in the economy as a whole. Innovative projects were frozen, staff were laid off, and related industries suffered. Alibaba, for instance, shut down its quantum computing lab.

Ironically, China — which feared external competition — ended up weakening its own tech giants, widening the gap with the USA. In 2018, 9 of the world’s 20 largest internet companies were Chinese. By 2023, only 6 remained, while the number of American companies had risen to 12.

Realizing the scale of the overreach, and considering the economic slowdown, the government ended the «regulatory storm» in 2023. A new phase of liberalization for DPs has begun.

Part 4, the threat of foreign platforms for Kazakhstan

The presence of Chinese DPs (Taobao, Pinduoduo, Temu) may seem beneficial for consumers — offering a wider selection of goods, lower prices, and greater competition for local players. However, behind these visible advantages lie systemic risks. Chinese marketplaces are non-autonomous private actors. They maintain close cooperation with the government.

In China, DPs serve as an extension of the state body. The government uses them as tools of «collaborative governance» while maintaining strategic control over them. Platforms that cover large segments of the population operate under formal agreements and memorandums with the state for assistance and data sharing:

National security — tracking the digital mark of terrorism suspects;
Data transmission to law enforcement — including phone numbers, in-app messages, and product listings of fraudulent businesses;
Supreme People’s Procuratorate — fighting commercial bribery by screening sellers;
Supreme People’s Court — sharing information about debtors with DPs (Taobao, JD, Tencent) and authorizing them to enforce debt collection orders;
Bureau of National Statistics — receiving real-time big data;
Ministry of Civil Administration — population tracking.

At the same time, DPs collect excessively sensitive data, often unrelated to core business activities. Beyond addresses, bank card numbers, and order history, the apps may access users’ contacts, messages, voice recordings, and even calendar events. While most large tech companies collect extensive data («if you're not paying for the product, you are the product»), it is crucial to consider the unique nature of China’s political system.

In this «collaboration», the state remains the main one. Despite the rhetoric of «mutual cooperation», the state ultimately retains full control over platforms. Companies are acutely aware of this and try to minimize political uncertainty and avoid a new wave of repression.

In summary:

The resilience of digital platforms is explained by much more than simple convenience. They solve institutional problems in the development of market economies, acting as a substitute for difficult reforms such as establishing the rule of law. This is why they thrive in countries like China — and potentially Kazakhstan.
Digital platforms offer enormous support to economic development, performing many strategic tasks — by industrialization, fostering innovation, lowering the cost of living, and increasing incomes, especially in rural areas.
Foreign marketplaces are not just convenient; they carry systemic risks. Behind them often stand foreign governments, meaning this is not just market competition, but also political influence.