China’s Tech Giants Struggle to Catch the AI Wave
While the global tech landscape vibrates with excitement over artificial intelligence, China’s tech titans find themselves on the sidelines, struggling to capitalize on the burgeoning trend.
The Hang Seng Tech Index, a barometer of China’s tech sector, has visibly lagged behind the Nasdaq 100, demonstrating investor pessimism about China’s economic recovery and the ability of its tech companies to monetize AI. The Nasdaq 100 has soared over 75% since the introduction of ChatGPT two years ago, while the Hang Seng Tech Index has only seen a 16% gain.
This divergence highlights several challenges facing Chinese tech companies. Tencent Holdings President Martin Lau, speaking recently, admitted that the firm’s cloud computing business wasn’t experiencing the AI-driven explosion witnessed by its US counterparts.
"Obviously, the next thing we’re hoping for is AI," Lau said, "but there are some factors that make it a bit more challenging in China…"
Richard Clode, who manages Janus Henderson’s $1.85 billion Global Technology Leaders Fund, echoes this sentiment.
"With fewer startups, slower digitalization and restricted access to the latest chips," Clode explains, "the new trend is just not as powerful in China as in some other bits of the world.”
The dominance of US firms like Nvidia Corp. in the AI chip market further complicates the situation for Chinese companies. While recent US export restrictions on technological advancements have been less stringent than initially feared, the incoming Trump administration’s hardline stance on China adds a layer of uncertainty.
Adding to the pressure, China’s internet giants are grappling with weak consumer spending and fierce competition in their core e-commerce and gaming businesses. AI, touted as a potential savior, has yet to deliver significant relief.
Alibaba and Baidu, for instance, reported sluggish growth in cloud revenue for the September quarter – a stark contrast to the over 30% growth seen at Microsoft’s Azure and the near 20% gain for Amazon’s AWS. While Baidu and Tencent claim to have sufficient chips for training large language models for the foreseeable future, monetizing these AI investments remains a key hurdle.
Alibaba, Tencent, and state-backed competitors are locked in a bitter price war to attract cloud customers hesitant to spend, while Baidu’s recent results indicate that AI-powered search content has failed to ignite advertising sales.
“Although investors may speculate on Chinese AI application firms based on the trading of their US counterparts,” Daisy Li, a fund manager at EFG Asset Management HK Ltd. notes, "the fundamentals of the two markets are actually quite different."
The Hang Seng Tech Index has fallen by 18% from an October peak, while the Nasdaq 100 has seen a 7% gain in the same period.
Despite their lower valuation compared to US peers – trading at 15 times estimated forward earnings versus more than 26 times for the US tech gauge – Chinese tech stocks may not attract growth-focused investors in the near future.
For Clode, "I think the internet story is just maturing [in China], which means to a lower growth outlook. There’s not much growth and there are a lot of players trying to get that growth. So that’s not the best backdrop for investing."
