eMarketer’s new report, China Online, details how China, with over 111 million Internet users in 2005, represents a huge potential online market. Unfortunately, as noted in the report, e-commerce currently faces a range of constraints.

"In spite of an overall red-hot economy, getting e-commerce to grow inside China has been slow going," says James Belcher, eMarketer Senior Analyst and author of the report. "The country is physically huge, and even Chinese Internet users are not great believers in credit cards. As a result, the simple act of paying for goods is not easy. Getting them delivered is no mean trick, either."

The good news is that Chinese Internet users represent a desirable target demographic. They are largely urban, young and educated. They spend a lot of time online and can spread word of your product or service quickly, with their heavy usage of online forums and bulletin boards. They are also likely to have broadband access, so rich media offerings will not go to waste (as long as they are translated accurately).

"Large firms looking for a mass market (and there’s no reason to think "niche" in China at this point) should stick to urban areas, where Internet users are concentrated," says Mr. Belcher. "Opportunities also exist for companies that can make the e-commerce infrastructure work better. This includes handset makers and carriers, who can incorporate stored value cards in mobile phones, as many online orders are paid for upon inspection at retail locations."

In the future the Chinese e-commerce market could easily dwarf any other.

China is already the second largest nation in terms of Internet users, and the Chinese will continue wide scale Internet adoption through the end of the decade. The 111 million Internet users online last year still only represented 8.5% of the country’s population.

The Shanghai market research firm iResearch has reported on China’s Internet user numbers since 2001, and projects that growth will continue at around 25% through at least 2007.

"Google, Cisco, Yahoo! and Microsoft have received bad press in the past few months for some of their efforts in China," says Mr. Belcher. "Attempting to take a nuanced approach which recognizes the ingrained nature of state-sponsored censorship and user tracking, these firms ended up accused by rights groups of contributing to Chinese oppression. Their experience highlights the need for foreign companies to have a thorough understanding of the market, and even to consider a moral inventory, before moving into Chinese e-commerce."

More here.