This paper discusses the issue of upgrading industrial clusters from the perspective of external linkages. It is taken for granted that in most developing countries, due to the limited domestic market and poor traditional commercial networks, industrial clusters are able to upgrade only when they are involved in global value chains. However, the rise of Chinaâ€™s industrial clusters challenges this view. Historically, China has had a lot of industrial clusters with their own traditional commercial networks. This fact combined with its huge population resulted in the formation of a unique external linage to Chinaâ€™s industrial clusters after the socialist planning period ended. In concrete terms, since the 1980s, a traditional commercial institution . the transaction market . began to appear in most clusters. These markets within the clusters get connected to those in the cities due to interaction between traditional merchants and local governments. This has resulted in the formation of a powerful market network-based distribution system which has played a crucial role for Chinaâ€™s industrial clusters in responding to exploding domestic demand. This paper explains these features in detail, using Yiwu China Commodity City as a case study.