Chinese investors are increasingly flocking to internet stocks, such as those in e-commerce and advertising, as a new focus within the artificial intelligence trade. This shift is occurring because of rapid advancements in low-cost AI in China, which market participants believe will transfer more value to companies owning the applications and services consumers use daily. The KraneShares China Internet exchange-traded fund has gained over 20% since June 25, outperforming the Hang Seng Index and contrasting with the Philadelphia Semiconductor Index's roughly 11% decline during the same period.
This trend reflects a growing sentiment that the primary beneficiaries of AI are broadening beyond hardware manufacturers to companies delivering AI services directly to consumers and businesses. Chinese hyperscalers like Alibaba and Tencent are seen as significant beneficiaries due to cheaper operational costs and models, which are expected to spur demand and improve margins. Alibaba's Qwen3.8-Max model, for instance, is now a leading coding model, and Silicon Data's blended inference-price index has fallen 36% since May, making AI more economical for various services.
Alibaba Group Holding Ltd. has become a particularly favored investment among Chinese traders, with HK$13.5 billion ($1.7 billion) worth of its shares bought via mainland-Hong Kong trading links in a recent week. This surge in interest follows Alibaba's strong AI-related revenue in the June quarter and an 18% stock surge, making it the best performer on the Hang Seng Tech Index. Wall Street analysts have also become more bullish, with at least 20 upgrading their price targets and projecting a 17% rise in the stock over the next year.
Despite this optimism in internet stocks, broader market concerns persist. Chinese leveraged traders are unwinding their stock bets, with the outstanding balance of stocks bought with borrowed money dropping to $390.1 billion, 13% below its June 25 peak. This deleveraging is influenced by rising global bond yields, inflation fears, and Beijing's reluctance to implement a broad stimulus. The Star Market 50 index, central to China's AI trade, is nearing a previous low after a 26% tumble in July, reflecting jitters about AI investment monetization. However, investors still believe that China's cloud and internet stocks are only beginning to be re-rated as beneficiaries of falling AI costs after years of underperformance.
