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PayPal Taps Cross-border Trade Potential With New China Deal

EBay's online payment service PayPal is hoping to hit a "sweet spot" in China's e-commerce market by making it easier for Chinese merchants to make money from overseas sales.

On Tuesday, PayPal signed an agreement with the Chinese city of Chongqing to jointly develop an international e-commerce hub that seeks to build cross-border trade between Chinese merchants and buyers from abroad.

PayPal, with access to 190 countries and regions, has become an important tool for Chinese merchants wanting to make sales to Internet users abroad. At the end of this year, the company expects China to have more than 1 million users of its online service, most of them small and medium-size businesses.

Chinese merchants, however, still face obstacles with online transactions, said PayPal spokesman Dickson Seow.

One major challenge is that Chinese merchants making sales to the U.S. are limited to converting under $50,000 each year, unless they apply for the right license. Exchanging the foreign revenue into Chinese currency can also be cumbersome, with merchants forced to go to a bank and wait days before they receive the money, Seow said.

PayPal's agreement with the Chongqing government is meant to help resolve these problems. Next month, the company is launching a pilot program with the municipal government that will work toward finding solutions and streamlining those processes for Chinese merchants.

"Our goal is to unleash the full potential of Chinese small businesses and entrepreneurs to sell to the world," said Chris Yao, PayPal's vice president of Greater China, in a statement.

PayPal believes the partnership has the potential to benefit Chinese merchants across the country, including mobile app developers wanting to find better ways to sell their products. The two parties will also be working to set up five international e-commerce centers that focus on business development, merchant training and other areas.

While PayPal has an extensive network abroad, the online payment service has yet to catch on in China. Instead domestic companies dominate the market. The biggest is Alipay, a part of Chinese e-commerce giant Alibaba Group. The service has a 50 percent market share, according to Beijing-based research firm Analysys International.

PayPal's new move, however, plays to its strength. "Our sweet spot is cross-border trade," Seow said. "We have 90 million active accounts, they have the purchasing power."

At the same time, China's e-commerce market is booming. The online payment market recorded a total transaction volume at 725.5 billion yuan (US$ 109 billion) for the first three quarters of 2010, according to Analysys International.

PayPal also stands to benefit from partnering with Chongqing's municipal government, said Mark Natkin, managing director for Beijing-based Marbridge Consulting. Chongqing, located in southwestern China, has a population of more than 31 million and is developing a growing IT sector.

The Chinese government has increasingly worked to regulate the online payment service market, requiring the companies to receive official approval, Natkin noted. "It's a challenging market for a variety of reasons and one of those is the regulatory issues," he said. "Another one of those is the competitive landscape."

"It's hard to say at this point whether this will be the secret sauce that suddenly propels PayPal's business in China," Natkin added. "But the first step is making sure you are in the game."

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