My background is supply chain and logistics, currently working for Amazon. The simple answer here is that they are losing money. I'm not familiar with Ali expresses rules, costs, inventory practices, or shipping arrangements, but I can absolutely guarantee you that there is no way that there was any profit made on this item. The price is just too low. Now to answer the more important questions:

1) Why? Because large marketplaces are monumental beasts to manage, so they come up with a variety of rules that simplify operations. Amazon does this with FBA: if your item is above a certain size/weight threshold it costs one price, otherwise it costs another. Those thresholds don't make sense from a rational optimization perspective, because costs for storage and shipping are only loosely coupled to those sizes and weights but can vary wildly based on any number of other factors including distance, shipping speed, inbound and outbound processing costs, etc.. In many cases, the combination of factors is just right and Amazon loses money. But they keep it a 2-tier structure because it makes it easier to manage the business, and makes it easier for FBA sellers to understand it.

2) How? Their costs probably are monumentally lower than most people think, so that mitigates the damage from people buying items like this. They have special import arrangements (and seeing as it is china, they probably have export subsidies as well), pre-negotiated rates with carriers, and likely do a significant amount of pre-sorting and aggregation themselves which gives significant leverage in negotiation of those rates. Amazon does this with their sort centers: Instead of dumping 20k packages on a UPS truck with 15k different zip codes, they will sort them off of the outbound line into pallets with small geographic clusters of destinations. These go to sort centers which aggregate similar pallets from other areas. Then we drop those pallets off right on the doorstep of the local post office. When they do this, they get massive discounts on delivery, and often delivered the same day that it gets dropped off.

Furthermore, sometimes money-losing items have a way of lowering the barrier to future purchases. While there is some truth to this notion (If you can get someone to buy once, their subsequent conversion rates skyrocket), some companies take it overboard...literally trying to buy new customers that will someday be suckered into buying from you at a higher but more profitable price point. In reality, the loyalty of penny pinchers (the target market for this strategy) is near zilch. You lose money on them, and they might buy from you again, but you still have to work at being the low cost choice.

Jet.com is currently pursuing the strategy of selling dollars for 90 cents, but hoping that it encourages loyalty and hoping their cost structure will magically (hehe) lower itself towards a level of profitability someday. Here is for those betting for or against their future: Cost structures don't magically lower with size. Some costs do, some costs get worse. You have to work very hard and very intelligently to ensure that costs stay in check as you grow, and work even harder to make them go down. IMO, with assumptions like that they are well on their way to a fast bankruptcy.