China's Stock Selloff Isn't Souring PayPal’s Outlook

PayPal this week released new research predicting a robust market in China for U.S. retailers, a bullish outlook that’s not being tempered by the vast selloffs in the Chinese financial markets.

"That was a significant hit to the stock market," said Melissa O'Malley, director of global merchant cross-border trade initiatives for PayPal. "But the middle class in China is growing by leaps and bounds and we don't see that changing."

In research released July 28, PayPal calls the growth in China "phenomenal" and an "undeniable" opportunity for retailers in the United States. The research predicts online spending will increase at a rate of about 25% early from 2014 through 2016; while mobile commerce will increase at a yearly rate of more than 50% over the same period. The top growth categories are leisure and hobbies, baby/children's goods, health and beauty, clothing and footwear, and entertainment. All categories should expect online spending to increase by about 20% in 2015, according to the research.

PayPal's research also suggests there is a huge market for U.S. retailers among Chinese consumers. It found 74% of adult Internet users in China have made a purchase from a U.S. retailer, with more than half of consumers in China planning to begin or increase cross-border purchases in the next 12 months.

PayPal recently partnered with China UnionPay to bolster a PayPal program called China Connect, which allows international merchants to sell to consumers in China. It's similar to a program from Alibaba affiliate Alipay that connects Chinese consumers with retailers inside the U.S.

"We give them the lay of the land. And U.S. retailers are the number one destination for cross-border shopping from China. If a merchant is thinking about selling into China, there is a captive audience," O’Malley said.

China Connect helps merchants manage local issues such as compliance and security. The partnership with UnionPay opens up one of the largest payment networks to U.S. retailers—there are more than 4.7 billion Unionpay accounts.

"We're removing some of the friction that goes into entering other markets," O'Malley said.

PayPal's not alone in pursuing opportunities in China. Apple CEO Tim Cook has dropped hints in public remarks about partnering with Alibaba. Visa and MasterCard have been outspoken about their long-term plans to take advantage of loosening government restrictions to offer their services in China. Among U.S. retailers, Walmart plans to enable Alipay payments in the entire country by the end of the year.

During Visa's most recent earnings call, CEO Charlie Scharf reiterated the company's commitment to China.

"We continue to move forward with our work to enter the domestic Chinese payments market," Scharf said during the call. "We believe our ability to help them grow will help accelerate broader economic growth within China, both in the cities as well as the rural areas. We continue to view this as a significant and important opportunity."

China's financial market has been in sharp decline for most of the summer—on July 27 alone the Shanghai Stock Exchange Composite Index fell nearly 9%, or the equivalent of a 1,500 daily drop in the Dow Jones Industrial Average. These declines have come despite government efforts to stabilize the market, and have sparked concerns about other weaknesses in the Chinese economy, including real estate and industrial output.

"We literally just did this study so we don't see a change from the volatility," O'Malley said.

The market decline should also not hurt Alibaba's payment initiatives, said Tristan Hugo-Webb, the associate director of Mercator's Global Payments Advisory Service.

"Alibaba has plenty of capital and can devote ample resources to Alipay and other payment initiatives regardless of the Chinese market," Hugo-Webb said.

However, Alibaba may still struggle to gain a foothold in the U.S., the analyst said. "It just hasn't been able to do so successfully. Instead of looking at the U.S. market, Alibaba should be focused on developing markets in Asia where it has more long-term potential."

Other international technology companies are partnering with Alibaba. For example, Terapeak, a Palo Alto, Calif.-based marketplace analytics company, is partnering with Alibaba.com to help online retailers source inventory. Terapeak users will view, search and filter more than 30 million trending products on Alibaba.com to help retailers make product decisions and set prices.

The partnership helps sellers determine the right price for products sold via Alibaba's e-commerce site. "You know you have a good product, but how do you know it's the right price?" said Kevin North, CEO of Terapeak, which also works with eBay and Amazon.com.