It looks like a couple of factors may be leading eBay to leave the Chinese market completely. Shanghai Daily is reporting that eBay has agreed to sell eBay’s China division and its PayPal service to Tom.com, a company that already distributes eBay’s Skype service to the Chinese market.

Two reasons are cited. First, eBay, which had as much as 90% market share in China for C2C transactions, has lost significant market share to upstart (and free) rival Taobao. eBay is now left with just less than 30% market share for C2C transactions, even after moving to eliminate transaction fees in China a few months ago.

Second, China is preparing new regulations limiting foreign ownership of companies operating online payment systems. After looking unsuccessfully for a partner on its Chinese PayPal service, eBay faces significant regulatory problems.

This comes on the heels of the departure of eBay China’s CEO, Martin Wu. PayPal China’s GM, Liao Guangyu, will take over Wu’s job.

No word from eBay on this yet. Until then, this is speculation, not confirmed fact. As bloggingstocks suggests, this may only be a move to simply partner with another strong player in the Chinese market, as Yahoo has done with Alibaba.

While its certainly significant that eBay is apparently leaving the Chinese market, what interests me most about this move is how effectively a startup ate into eBay’s market share with a zero price strategy. This is something that has been tried and failed repeatedly in the U.S. Perhaps it’s time to try again. First someone needs to address the lock eBay has on user feedback/reputations (see our posts on Rapleaf, a startup addressing this market).