PayPal Holdings Lays the Groundwork for China Growth

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PayPal Holdings (NASDAQ: PYPL) stock is up 89% over the last year as the mobile payment leader continues to post consistent high growth in revenue and total payment volume as more consumers shift to e-commerce. The Amazon.coms of the world have been driving consumers to the convenience of online shopping for a while now, but e-commerce still hasn't quite reached 10% of U.S. retail sales, so there is plenty of room for growth.

In addition to the opportunity PayPal still has in the U.S., it is just getting started in the world's largest mobile payment market -- China. PayPal's recent partnership agreement with Baidu (NASDAQ: BIDU) will allow the internet search giant's 700 million users to choose PayPal as a payment option in Baidu's digital wallet.

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Although Baidu's digital wallet service trails its competitors in market share, this is a big deal as China's cross-border e-commerce market is booming thanks to growing demand from Chinese consumers looking for better deals from U.S. merchants. This agreement with Baidu could significantly boost demand across PayPal's payments network over the long term.

PayPal sees a big opportunity in China

PayPal has had its eye on China for a while, but the recent boom in cross-border shopping by Chinese consumers seems to have pushed PayPal management to take a more proactive position in China's mobile payment market, which reached an estimated 38 trillion yuan in 2016. That's over $5 trillion at current exchange rates. By comparison, the U.S. mobile payments market is only expected to reach a paltry $189 billion...by 2021.

Within this multitrillion-dollar market is China's cross-border e-commerce market (Chinese customers buying from international businesses), which has risen exponentially from less than 100 billion yuan in 2013 to over 400 billion yuan in 2016. This market is expected to nearly double again by 2018. For perspective, 400 billion yuan is about $60 billion at current exchange rates, which is larger than the current size of the U.S. mobile payment market.

China's cross-border e-commerce market has taken off the last couple of years for a few reasons. For one, rising incomes for China's middle class have helped spur cross-border shopping, with encouragement from the Chinese government to increase consumer spending. Another incentive for Chinese consumers is the huge cost savings available by buying directly from U.S. merchants.

Government regulations could stall this growth, but not much

While there is always the risk that the government could create new regulations to curb cross-border shopping in order to incentivize consumers to shop at local stores, cross-border trade is growing so fast that the government will not likely do anything to completely stomp it out, especially as any new regulation that discourages cross-border trade could cause a backlash from Chinese consumers.

PayPal clearly sees the growing demand for e-commerce and cross-border shopping continuing in China over the long term. Here's what CEO Dan Schulman said on the company's second-quarter conference call with analysts:

PayPal's growing base of 17 million merchant partners is a great asset to have as it caters to the needs of Chinese consumers. However, PayPal faces well-entrenched tech giants in China that are dominating the mobile payments market.

How much does competition matter?

Alibaba's AliPay and Tencent Holdings' TenPay dominate China's mobile payments market with 92% combined share. Baidu's digital wallet has such a tiny market share it doesn't even register on the map, but PayPal has advantages that should allow it to gain plenty of business in China over the long term.

What PayPal offers Chinese consumers that others can't match is a complete suite of services spanning security features, customer service, peer-to-peer payments, and convenient features like One Touch, which keeps you logged in, making buying things easier.

One of PayPal's biggest advantages is its platform-neutral position, which is one reason PayPal has been successful forming partnerships with competing credit card companies, banks, and tech giants. PayPal helps facilitate digital payments; it doesn't compete with any of its merchants or partners.

The deal with Baidu is just one step for PayPal in the world's largest mobile payment market. It's very likely the mobile payment leader will strike more partnerships with Chinese companies in the future.

China will be more of a challenge for PayPal than the rest of the world, but the Chinese payments market is growing so fast it should lift all boats. After all, China's multitrillion-dollar mobile payments market is so huge that just capturing a sliver of that market would match the total U.S. market.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends Amazon, Baidu, and PayPal Holdings. The Motley Fool has a disclosure policy.