Dec. 19 (Bloomberg) -- EBay Inc. will close its primary China Web site and form a partnership with billionaire Li Ka- shing after losing users in the world's second-biggest Internet market, a person familiar with the situation said.

The world's largest online auctioneer will pay about $40 million for a 49 percent stake in the venture with Li's Beijing- based Tom Online Inc., an Internet company that sells services such as ring tones for mobile phones, said the person, who declined to be identified because the agreement isn't public. Tom Online shares were suspended, pending an announcement.

EBay will shut the China site after almost five years in which it lost market share to local rivals that offer free services. The San Jose, California-based company started operating in China following the closure of its Japan site in March 2002, and a month after it opened in Taiwan. In June EBay closed its Taiwanese site to form an auction venture with PC Home Online.

``EBay is another example of how hard it is for foreign companies to be successful in China,'' Mark Canizares, an analyst with CitisecOnline in Manila, said by telephone. ``The Internet in China and the U.S. is culturally very different so a local Chinese company like Tom Online has a better chance at being successful.'' Canizares rates Tom Online shares ``buy'' and doesn't own them.

Shares Surge

Tom Online shares rose as much as 16 percent today in Hong Kong and ended trading 14 percent higher at HK$1.72, their biggest one-day percentage gain since Aug. 18. Trading of the shares was suspended at 2:30 p.m. local time pending announcement of a transaction involving the company, Tom Online said in a statement to the Hong Kong Stock Exchange.

The company's American depositary shares climbed 12 percent to $17.28 in U.S. trading today. EBay shares fell 29 cents to $32.13 in Nasdaq Stock Market composite trading today and have dropped 26 percent this year.

EBay will keep a site that allows Chinese sellers to do business with buyers outside the country, the person said.

The company follows fellow U.S. company Google Inc. in losing market share in China to local companies. Beijing-based Baidu.com Inc. may raise its share of the Chinese search market to 56 percent next year, more than double Google's 19 percent, according to a Sept. 28 Credit Suisse Group report.

Yahoo! Inc. agreed in August last year to swap $1 billion in cash and its local unit for 40 percent of Alibaba.com Corp., China's biggest online retailer.

Revenue Rose

Linda Liu, a Beijing-based EBay spokeswoman, declined to comment on reports that the company will shutter its China site and form the Tom Online partnership. Rico Ngai, a Beijing-based spokesman for Tom Online, declined to confirm or deny that there was an agreement.

EBay said in October that third-quarter international revenue rose 38 percent from a year earlier, more than the company's 26 percent sales growth domestically. It didn't specify China sales or earnings. EBay is 37 times larger than Tom Online by sales.

Shares of Tom Group Ltd., which owns a 65.7 percent stake in Tom Online, rose 5.6 percent in Hong Kong to HK$1.14. Trading of the stock was suspended at 2:30 p.m. local time today pending announcement of a transaction involving Tom Online, the company said in a statement.

Japan Site

The American company closed its Japan site after two years of operation. The Web site, which opened in February 2000 in partnership with NEC Corp., was the fourth-biggest online auction site in Japan, trailing market leader Yahoo! Japan Corp.

EBay bought a 33 percent stake in EachNet.com Network Information Service Co., then China's biggest online auction site, for $30 million in March 2002. EBay bought the balance of EachNet shares in June 2003, paying $150 million.

At the time of the acquisition, EachNet had an 80 percent share of the Chinese online auction market, according to Shanghai-based research company IResearch Inc. EBay said in February last year it intended to invest $100 million during 2005 in China, a market it then called the ``largest e-commerce opportunity today.''

As of Sept. 30, EBay had a 40 percent share of the market, according to Beijing-based research company Analysys International.

EBay in June formed a Web auction venture with PC Home Online in Taiwan. The U.S. company had entered the Taiwanese market in February 2002 when it agreed to buy NeoCom Technology Co., the island's biggest auction site, for at least $9.5 million in cash.

Doubled Share

EBay more than doubled its share of the Chinese Internet auction market in the third quarter to 40 percent from 17 percent three months earlier, according to Analysys. The American company outpaced growth for Alibaba's Taobao.com unit, which raised its share to 44 percent from 32 percent, Beijing- based Analysys said. Tencent Holdings Ltd. raised its share to 14 percent from 7.5 percent, the researcher said.

EBay's venture with Tom Online will be able to introduce products and services faster than previously because it won't need to coordinate with EBay's U.S.-based management, Liu Bin, an Internet analyst with Beijing-based research company BDA China Ltd., said. Tom Online's management also has a better understanding of the Chinese market, he said.

``Tom Online's local management team should help raise EBay's market share, but it won't be by much if EBay continues to charge users while rival sites remain free,'' Liu said.

EBay said in January that users buying goods from its China site wouldn't have to pay fees, while charges still applied for selling goods. Alibaba and Tencent allow users to buy and sell products for free on their sites.

Users of the Taobao.com site buy an average of $5 million of goods a day, Alibaba said.

China was home to 123 million Internet users at the end of June, second only to the U.S., according to government data. The value of online auctions in China may rise to 46 billion yuan ($5.9 billion) in 2010 from 5.6 billion yuan last year, according to IResearch.

To contact the reporter on this story: Danny King in Los Angeles at dking19@bloomberg.net; John Liu in Shanghai at jliu42@bloomberg.net

Last Updated: December 19, 2006 16:33 EST