China's E-Tail Awakening

New online-payment systems are drawing wary consumers into the world of Web commerce

Online shopping has long been the laggard of the Chinese Web. While ad-driven outfits such as search company and portal Sohu (SOHU) have seen revenues—and stock prices—soar, China's e-tailers have had a rougher time. One big reason is credit cards: It's tough to sell online in a country where few people have them, and those who do are reluctant to use them for fear of fraud. Consumers who actually shop on the Web typically opt for a solution that's both expensive and inconvenient for merchants: paying cash on delivery.

But now, business for China's online retailers is picking up. Consumer e-commerce in the country will top $1billion in 2007 and grow at an average of 34% annually over the next three years, according to the Internet Society of China, a trade group. While few Chinese pay with plastic, e-tailers are getting a big boost from dozens of online-payment systems offered by banks and outfits similar to the popular U.S. service PayPal (EBAY). Online payments by both companies and consumers are expected to triple over the next two years, to $24 billion, market watcher iResearch says. "There has been a lot of progress," says Hanhua Wang, head of's (AMZN) operation in China, Joyo Amazon. About 15% of Joyo's sales are now paid for online, double the level of two years ago.

The spectacular initial public offering of on Nov. 6—the biggest ever for a Chinese Net player—will provide a further lift. The Hangzhou company, which nearly tripled in value on its Hong Kong debut, is an exchange where small and midsize businesses buy and sell everything from semiconductors to shark fins. Its parent company, 39% owned by Yahoo! (YHOO), also runs China's top consumer auction site, Taobao, and is likely to use some of the $1.5 billion it raised to fund growth there.

A key part of Taobao's success has been AliPay, the country's No. 1 online payment service, with half the market. The system, free when used for purchases on Taobao, has helped increase the confidence of many online shoppers. It has more than 47 million users, and every day it processes some 780,000 payments worth a total of $20 million. "Only when the buyer gets the thing can the seller get the money," says Shao Jie, a 25-year-old writer in Beijing who has bought "countless" items via AliPay, from $4 boxes of instant noodles to a $435 limited-edition teddy bear.

AliPay faces plenty of challengers. Joyo, for instance, has its own payment system and doesn't allow customers to use other services. Hong Kong-listed Tencent, China's top instant-messaging system, also has a payment service, as do many banks. All told, China has about 50 such services, says Liu Bin, an analyst with Beijing consulting firm BDA. One thing yet to take off, though, is credit cards. Chinese consumers, says Liu, remain "afraid of online fraud, so they don't use them."

The growth in payment options is setting the stage for new Net businesses. Soleil China, a Guangzhou-based exporter of pet toys and other accessories such as leashes and collars, once shied away from e-commerce in its home market because of the difficulty in getting paid. But with the new systems, the company is starting a Web store targeting Chinese consumers. Online payments are "a very good opportunity for us," says general manager Kate Feng.

Still, most e-tailers aren't about to give up on lower-tech payment methods. Joyo, for instance, has expanded its COD service to 345 cities, up from just 55 two years ago. COD is hardly ideal: Workers must learn to recognize counterfeit bills, and it's risky to send delivery people into the streets carrying wads of cash. Nonetheless, the company feels it has little choice. "We want people to pay online," says CEO Wang, "but the customer has certain habits."

Before it's here, it's on the Bloomberg Terminal.