On Wednesday eBay reported another quarter of strong sales and earnings growth. But news out of China points to a big challenge facing the great auction empire. Hammered by fierce competition from Chinese auction sites, most notably Taobao.com (run by Yahoo-backed Alibaba), eBay today stopped charging transaction fees, according to the Financial Times. It continues to charge sellers a small listing fee, but the FT notes that the discontinued transaction fees had been much larger:

In China, eBay’s transaction fees were previously charged as a percentage of the value of completed sales, ranging from Rmb10 for a sale worth Rmb500 ($62) to Rmb115 for one worth Rmb20,000. Its listing charges are much lower – a maximum Rmb3 for items with an initial price of Rmb2,000 or more.

In contrast to its retreat on fees in China, eBay on Wednesday announced another substantial fee hike for the U.S. The company’s been able to get away with regular increases in fees here, despite grumbling from sellers, because it’s faced only weak competition. But the emergence of sites like Craigslist and Google Base suggests that eBay will not always be so well shielded from rivals. It seems likely, for instance, that some entrepreneur will get backing to launch a sophisticated auction site supported not by fees but by ads. If that does happen, the incentives for sellers to make a switch will go up substantially – and eBay will have no choice but to respond by sweetening the pot for sellers, as it just did in China. EBay has big advantages, but it may not be able to avoid a bidding war for listings.

Even in China, eBay long claimed that it would be able to maintain its transaction fees. As the FT reports: “EBay China had repeatedly waved aside challenges by Alibaba to scrap its charges, saying in October: ‘Free is not a business model.'” “Free” may not be a business model for eBay, but it may well be a business model for eBay’s competitors. And that’s the problem.