Spending on artificial intelligence provided a boost to some Chinese tech companies in the first quarter despite economic challenges. Brian Tycangco, an analyst at Stansberry Research, highlighted strong growth in the cloud businesses of Alibaba and Baidu, with Alibaba’s cloud revenue rising 18% year-on-year and Baidu’s AI cloud business growing 42%. He noted that cloud services could soon become the second-largest business segment for both companies and serve as a foundation for renewed robust growth after years of single-digit revenue increases. Alibaba, Tencent, and JD. com also reported double-digit marketing revenue growth, driven by AI tools that enhanced consumer targeting. This shift signals an evolving Chinese market landscape. Morgan Stanley’s chief China equity strategist, Laura Wang, observed that AI, technology, and the new economy sectors are emerging as market leaders, replacing the consumer and internet stocks that had previously dominated gains following a disruptive five-year period after early 2021. Among Morgan Stanley’s 60 Chinese AI stock picks, overweight-rated, Hong Kong-traded companies with projected upside above 50% as of May 19 include: Gushengtang, a healthcare company developing AI for traditional Chinese medicine and an “AI physician assistant, ” which saw a 12. 7% increase in customer visits to 1. 21 million in Q1; and Bairong, which provides cloud-based AI services to state-owned banks and financial firms and whose AI evaluation models are used by Alibaba’s Taobao and Tmall platforms. Morgan Stanley analysts prefer Alibaba and Tencent over Baidu and iFlytek, and favor Meituan, Meitu, and Trip. com over Kuaishou and JD. com. Among mainland-listed firms, 68% referenced AI in their 2024 annual reports, up from 43% in early 2024, according to HSBC Qianhai Securities research head Steven Sun.

HSBC also noted a slight upward revision in 2025 capital expenditure expectations for major cloud service providers, reflecting confidence in their AI businesses. The information technology sector saw earnings rise 24. 7% in Q1 year-on-year due to increased AI adoption, making it one of the fastest-growing sectors. HSBC’s buy-rated pick Sangfor, a Shenzhen-listed enterprise software and cybersecurity firm, expects accelerating AI adoption to drive earnings growth. Chinese company DeepSeek surprised global investors in January by rivaling OpenAI’s ChatGPT at a fraction of the cost, and several Chinese firms have since launched AI tools for video and 3D model generation. Morgan Stanley analysts attribute China’s recent tech advances to its large pool of engineers, data resources, and vast social media and e-commerce ecosystem, alongside supportive government policies that accelerate tech adoption. They believe these structural improvements will be less affected by ongoing U. S. -China tariff disputes and macroeconomic challenges, making China attractive for long-term foreign investment in distinctive companies not found elsewhere, despite the broader slowdown. Chinese listed stocks generate the vast majority of their revenue domestically, with only about 3% exposure to U. S. revenue, the analysts added. — CNBC’s Michael Bloom contributed to this report.