To understand how "grassroot" Chinese internet companies make money, one does not need to look much further than Zynga.
They spam low production value wares or blatantly clone the hottest startup in the valley, engage in ethically questionable business strategies, great guanxi with officials would not hurt. You think Zynga and Groupon are bad? Their Chinese copycat are far far worse.
I'm mostly with you...but can you explain how the China Zyngas and Groupons are worse?
One thing nice about Chinese e-commerce is protection from vendor abuse. For example, Taobao provides an easy escrow service for buyers. Most others follow suit. Purchases where you entire your credit card and later find out its recurring and can't get the billing to stop is nowhere near the problem it is in the U.S.
How Chinese Zyngas are worse? Their games can be down right unplayable unless you pony up real money to purchase virtual goods like coins and potions and whatnot and they come up with new ways to nickle and dime their existent users every day, they strip away what was free or available through in game farming or change game mechanics to make you need more coins or whatever until they leeches you dry.
How Chinese Groupons are worse? They get merchants to sign up under false assumptions to do outrageous deals which can get business owners seriously in debt, they also conspire with some business to commit false advertisement, and they delay payment, they deflect refund, they lie to both deal hunters and business owners, they burn money like crazy and their accounting books respectable firms won't touch with a 10 feet pole.
They spam low production value wares or blatantly clone the hottest startup in the valley, engage in ethically questionable business strategies, great guanxi with officials would not hurt. You think Zynga and Groupon are bad? Their Chinese copycat are far far worse.