“Foreigners have an out-dated misconception about Chinese-made products,” Mr. Li begins as I lean forward in his car to listen closely. “Foreigners believe that all Chinese products are poor quality and inexpensive. But this just isn’t the case anymore. This is what I am going to show you today, and what our company is going to show the world.” We pull into a large parking lot facing three giant connected buildings. We have arrived in Yiwu, the self-proclaimed commodities capital of China.

I first heard about Yiwu, a city with a population of about 1.2 million in China’s Zhejiang province, from the Greater China head of a large multinational e-commerce company. He had just returned from a day trip there, and I could tell from the excitement in his voice that the marketplaces of Yiwu were unlike those anywhere else in China. I waited eagerly for months until I had the opportunity to visit. Finally, during a brief stay in Hangzhou, I reached out to an old friend to make introductions to set up an ‘insiders tour’ of the city.

Li Peng Chao, one of three founders of MarketYiWu.com, held up a sign with my name at the Yiwu train station on a humid and drizzly Saturday morning. He led me to his brand new blue Mazda 7 sports sedan. Mr. Li, a heavy-set man in his early 30s recently quit his job in the logistics industry supporting the massive outflow of Chinese goods. Through MarketYiWu.com, Mr. Li hopes to connect the suppliers of Yiwu with foreign businesses around the world, showing them that China’s manufacturers are gradually moving up the value chain to produce goods which meet the needs of developed nations.

Low-end manufacturing is continuing to shift from China into countries like Malaysia, Vietnam and parts of India. This is largely due to the increasing cost of production in China–the minimum wage for blue-collar workers has increased more quickly than the current rate of inflation of roughly 4.8 percent, forcing companies to either relocate or increase prices. Mr. Li argues the result is that products staying in China are improving in quality to stay competitive, but at relatively higher prices to stay profitable.

As I step into Yiwu Building No. 1, two things catch my eye. First is the vastness of the building–the halls are so long that the stalls seem to stretch on for miles and fade off into the horizon. The markets of Yiwu cover 43 industries, 1,901 commodity categories and more than 400,000 types of goods. The floors are grouped by product category, with similar products placed together. Picture thirty stalls of designer belt buckles side-by-side, with no leather belts in sight. If you want the leather, you have to go to another floor that may take you over an hour to find. “Behind each one of these small stalls is an entire factory waiting to produce a large order,” Mr. Li explains, “Think of the stall as a showcase. You are not going to buy one product here, you are going to place an order for hundreds or thousands of a product.”

The second thing which strikes me is that despite the expansive hallways, there seems to be relatively little activity. Before my trip I imagined the halls of Yiwu’s market would resemble those of Beijing’s Silk Market, with shopkeepers aggressively hailing customers into their stalls and pushing them to buy their merchandise. Yet this could not have been any further from the reality. Each stall has only one to three staff members, whose business activities range from watching movies online, playing cards with other stall keepers, and sleeping on their desks. When I ask Mr. Li why no one seems to be working very hard, he explains that most days nothing happens. All it takes is a few big orders each year for these operations to stay profitable. They therefore feel no urgency to go out and drum up business, since it will eventually come in on its own throughout the year.

After 45 minutes of walking, we finally come across some action. A middle-aged European woman in a leather bag stall stares vehemently at the stall keeper across from her at an uneven wooden table. Each holding a calculator in their hand, the customer types in a number, each strong keystroke resonating against the hard plastic. The Chinese stall representative responds by shaking her head angrily and pointing to the original price on the calculator in her left hand. According to Mr. Li, most foreign purchasers typically bring a translator to help with the initial stages of the procurement process; however, when bargaining over prices starts, the translator steps aside and the calculator standoff begins. Throughout the day I saw similar scenes enacted by buyers from all over the world–the Middle East, Africa, India, the US and Europe.

Mr. Li’s MarketYiWu.com is trying to digitize these international bargaining battles, by shifting the negotiations online and streamlining the purchasing process. With a few clicks, global citizens can now experience a trip to the Yiwu market right from their laptops. “My goal is to put the entire Yiwu market online for foreign buyers around the world to view our markets as if they were here visiting themselves.” Understanding that he has to be realistic about the initial goods they sell, MarketYiWu.com is selling easy-to-ship goods like jewelry, clothing and handbags to start. Their long-term plan is to add higher-value goods and expand the overseas business once their business model is proven successful.

How does MarketYiWu.com work? Mr. Li’s company partners with selected merchants at the Yiwu markets. His pitch is relatively straightforward: “You understand your product, but you don’t understand e-commerce. We can help you reach a broader audience through MarketYiWu.com, and we will only make money if you successfully sell your products.” When a merchant signs on, Mr. Li’s team brings the selected merchandise back to their office where a photo design team takes pictures and touches them up for the site–an extremely time-consuming process.

Once the product is added online, US-based buyers can click on their desired item, select quantity, and pay electronically via PayPal. Like many online marketplaces, there is no minimum order requirement for buyers on MarketYiWu.com, but what is unique about the site is that wholesalers in the U.S. can shop big and receive significant discounts as if they were visiting the Yiwu market themselves. To ensure foreign buyers feel comfortable shopping on their site, MarketYiWu.com conducts extensive due diligence on suppliers, and all payments are settled via PayPal.

The last stop on our day-long tour offers me insight into an important secondary market for Yiwu’s goods–the domestic Chinese market. Mr. Li takes me to a hat stall run by his wife, a lively woman in her mid-20’s. She pokes her head up from behind the flat screen monitor and stands up to greet us with a wide smile. She excitedly tells me about the different types of hats, where they were made and who the most popular buyers are. “This kind,” she says as she unravels a black elastic band holding a rolled-up piece of pink fabric, “I am selling like crazy to recent college graduates. College students and recent graduates without work are buying huge orders and selling them to their friends and on Taobao (a Chinese online consumer marketplace similar to eBay).” “Everyone’s shopping on the Internet now,” she added. “Why wouldn’t you? It’s cheaper than anything you can find in the store and you don’t even need to leave home.”

Mrs. Li touches upon a good point. Contrary to popular belief, China can no longer be seen only as a country of savers. China’s next generation of consumers are more willing than ever to use credit cards and shop on an increasingly secure online marketplace. In just the past five years, the total number of China’s credit users has grown from 13.5 million to a current 200 million. The China Internet Network Information Center (CNNIC) estimates that 140 million of China’s 420 million Internet users will shop online in 2010. Many will do so through Alibaba Group’s Taobao.com, the market leader, but others are also buying on smaller sites such as MarketYiWu.com. China’s domestic e-commerce market has tremendous potential, and will continue to be a key industry of focus in the coming years.

Are Chinese products really moving up the value chain? Maybe they are, but many of Yiwu’s goods–belt buckles, socks, and toys–do not exemplify this trend. However, I did see two grades of goods being sold there. The first grade is lower quality merchandise, which Li said tends to be distributed domestically or exported to other developing markets in Africa and Latin America. The second grade, which is typically exported to the U.S. and E.U., was of higher quality and paid more attention to details and product branding. Starting with lower-end products, Mr. Li’s MarketYiWu.com is pursuing the same path and challenge as many Chinese manufacturers–how to sell higher-quality goods to buyers in the U.S. and E.U. and also to an increasing domestic market.