SHANGHAI: Creaky banking and postal systems are conspiring against Chinese shoppers snapping up books and cosmetics over the Internet - and holding back a market that has lured the likes of eBay and Amazon.

When Shanghai native Lin Ying sold a stuffed bear via an Internet auction, the buyer insisted on completing the deal at the city's bustling People's Square.

"It was a gigantic Winnie the Pooh. Bidders jacked the price up to 350 yuan (US$42). So, of course, the winner had to see if it was the real thing," said the 28-year-old accountant.

With fraud cases grabbing headlines and postal deliveries often problematic, such "offline" transactions are a necessary inconvenience in China's budding e-commerce sector, industry executives and analysts say.

But unless those problems are resolved, executives fret, China's Internet shopping sector may never fulfil its potential.

Its online shopping market was worth 4.2 billion yuan (US$507.5 million) last year, and is expected to double this year, indicates market research firm Shanghai iResearch.

Its longer-term potential is considered huge - if its problems are resolved.

Drawn in by such numbers, global Internet giants - including eBay Inc, Yahoo Inc and Amazon.com Inc - have all taken the China plunge in the last year, paying a combined US$375 million to acquire domestic start-ups.

Fear of shopping

But only 10 per cent of China's estimated 90-million-plus Web surfers buy things on the Internet, compared with 38 per cent in the United States, industry executives said.

"Chinese do want to buy things online, but many are afraid to take the first step," said Toto Sun, general manager of Taobao, China's second-largest online auction site.

Taobao is a unit of unlisted firm Alibaba.com.

"They have many worries. Is it safe to wire money? Will the product I buy be defective, or worse, fake?" he said.

Such problems are dettering Baidu.com Inc, China's largest search engine, from broadening its focus, at least until the kinks are ironed out, said Chief Financial Officer Shawn Wang.

"E-commerce is definitely something we would consider very seriously. We're keeping our eyes on it," Wang said last Monday at the Reuters Asia Technology Summit in Shanghai.

About a quarter of online auction transactions in China are completed in person, and just 30 per cent of all Web shopping payments are handled over the Internet, in a society where cash is still king, analysts say.

The nation's credit card holders now number a scant 2 million, a fraction of its 1.3 billion people.

Hoping to increase that penetration, online travel agent Ctrip.com recently announced the launch of a travel credit card with China Merchants Bank Co Ltd.

The lack of a credible payment system is a major reason behind the low level of online sales in China, said Shao Yibo, chief executive of eBay's China venture, eBay EachNet, whose second-quarter transactions amounted to US$63 million.

EBay's Paypal online payment unit has hired consultants in Beijing to advise it on how to enter China's murky payment market, currently dominated by State-owned banks and mobile operators.

In the post

Online shopping in China also faces the speed bump of a sometimes unreliable and highly regulated distribution system dominated by State-owned China Post.

As sales to rural regions rise, officials in some areas are known to occasionally, and illegally, levy taxes on goods arriving from other provinces.

"(China Post's) customer service is considered poor, and its fees for transferring money are unreasonably high," Eric Wen, with Morgan Stanley, wrote in a research report.

But China Post will soon face stiff competition from the likes of DHL, owned by Germany's Deutsche Post, United Parcel Service Inc and FedEx Corp as China opens up its courier sector.

Online retailers, such as Dangdang.com and Joyo.com, bought by Amazon in August for US$75 million, have opted to strike out on their own, starting delivery fleets staffed by young men on bicycles who accept payment and wire back the money.

"We want to take advantage of China's cheap labour," said Peggy Yu, co-founder of Dangdang, which State-run media said had rebuffed Amazon's US$150-million acquisition offer.

Agencies via Xinhua

(Business Weekly 09/28/2004 page6)