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In the global AI race, China is the clear second. Rather than a negative, this positively reflects China’s innovation speed and ecosystem development, unmatched by any country outside the US.
Recently, AI has begun driving returns for China’s largest tech companies. Last week, Alibaba reported cloud business revenue growth of 26% YoY, well above consensus. Within cloud, AI-specific revenues grew triple digits for the eighth consecutive quarter, a material shift from earlier reports warning of compute oversupply. Previously, SCMP reported that just 30% of capacity was utilised. Today, AI demand exceeds supply.
Here are two quotes from the company:
- ‘Since July, Alibaba has released upgraded Qwen3, including a non-thinking model, reasoning model, and AI coding model, which are recognized as global top performers in their respective categories. Notably, our Qwen3 coder model has rapidly increased Qwen’s user adoption in overseas markets. We also open-sourced several models, such as the video generation model Wan2.2 and the text-to-image model Qwen-Image.’
- ‘Our investments in AI have begun to yield tangible results. This is evidenced by Alibaba’s – Alibaba Cloud’s return to rapid growth driven by AI demand and our AI-enhanced experiences across consumer and enterprise-facing scenarios. So we’re seeing an increasingly clear path for AI to drive Alibaba’s robust growth.’
US-China problems have somewhat reversed in recent quarters. The US has less of a chip shortage as NVDA and other producers ramp up, but there seems to be a chronic power shortage developing. China has no such issues given how quickly the grid has expanded in recent years, but chips remain in short supply due to US export controls. This has prompted Beijing to encourage a rapid expansion of AI chips as they seek to triple their production capacity. No wonder then Alibaba ramped up quarterly capex by 60% from the previous quarter, aligning with its three-year plan. Meanwhile, Tencent sees significant room to offer their open source models to developing countries.
The bottom line: AI is now driving revenues and higher returns for China tech. After years in the doldrums this industry now has government support to ramp up investment as end-demand far outpaces supply. Sure, profit margins are unlikely to equal the US Hyperscalers’, but for a largely unloved sector, this is a step in the right direction after battling it out in the loss-making e-commerce industry.
