SAN FRANCISCO -(Dow Jones)- EBay Inc.'s (EBAY) PayPal unit is in talks to add its online payment system as an option on Alibaba.com Ltd's (1688.HK) new AliExpress international marketplace, according to people familiar with the situation.

An agreement between the two companies would help expand PayPal's presence in China, as well as smooth Alibaba's entry into international markets, such as the U.S.

"The money will flow from the U.S. to China through PayPal," said one industry insider familiar with the situation.

It was unclear how close the two sides were to completing an agreement, the people said. PayPal declined to comment for this story, and an Alibaba representative did not immediately respond to requests for comment.

Any deal would come more than three years after parent Alibaba Group thwarted eBay's ambitions in China, ultimately forcing the San Jose, Calif.-based company to withdraw.

Alibaba.com last year launched AliExpress, a wholesale marketplace where retailers around the world can source electronic products, automotive parts, clothing and other unbranded merchandise from suppliers in China and Taiwan. The AliExpress Web site boasts that it is a "one-stop shop" offering wholesale prices, secure payments and full delivery tracking.

But the default payment option on AliExpress is Alipay.com, the parent company's online payment platform. While Alipay is the leading online payment platform in China, it remains largely unknown in many international markets, including the U.S.

The industry source said Alibaba.com, the Hong Kong-listed unit of China-based Alibaba Group, has recognized that Alipay's low international brand awareness is an impediment to the company's efforts to push into new markets.

"Merchants in the U.S. aren't comfortable with Alipay. They want PayPal," the industry insider said.

The deal could be a big boost for PayPal, which has emerged as a key growth driver for eBay as the ecommerce giant attempts to turn around its struggling marketplaces business.

PayPal had about 375,000 active accounts in China, Hong Kong and Taiwan, and they accounted for total payment volume of nearly $1.3 billion in 2009, a 12% increase over the prior year. A company spokeswoman said the lion's share of that amount was cross-border trade--helping Chinese merchants receive payments from foreign buyers--the same type of trade targeted by AliExpress.

EBay has had a difficult ride in China. After buying Shanghai-based Eachnet in 2003, former Chief Executive Meg Whitman boasted that she wanted to make China eBay's biggest market. But missteps and stiff competition from Alibaba's Taobao consumer auction Web site quickly squashed those aspirations, and eBay all but threw in the towel by the end of 2006.

Copyright © 2009 Dow Jones Newswires