China’s cheap AI is shifting investors’ focus to internet stocks

China’s rapid progress in low-cost artificial intelligence is strengthening the investment case for the country’s internet giants after years in the shadow of chipmakers, market participants say.

Investors are increasingly betting that falling AI costs will shift more of the industry’s value toward companies that own the applications and services people use every day, from search and e-commerce to advertising and enterprise software.

Since a low on 25 June, the KraneShares China Internet ETF has gained more than 20%, about twice the Hang Seng Index’s advance, while the Philadelphia Semiconductor Index has fallen roughly 11%. The shift reflects a growing belief that the biggest winners from AI may be broadening from those making the hardware to the companies delivering AI services to consumers and businesses.

“Chinese hyper scalers will benefit substantially because they have cheaper currency to run on, and cheaper models will increase the use of AI significantly by them and their clients,” said Hao Hong, chief investment officer at hedge fund Lotus Asset Management. “That is why BABA and Tencent are roaring lately. So cheaper tokens will spur demand. And cheaper serving costs can be margin positive for the Chinese hyper scalers.”

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Chinese developers have become increasingly competitive in open-weight AI models, narrowing the gap with global leaders while keeping prices low. Alibaba Group Holding’s latest Qwen3.8-Max model, for example, now ranks among the leading coding models on Arena’s benchmark, which compares AI systems on performance, speed, and cost.

Arena

Those advances are making AI cheaper to use. Silicon Data’s blended inference-price index has fallen 36% from its May peak, even as customers increasingly adopt more capable reasoning models and AI agents. Lower computing costs improve the economics of services such as search, advertising, e-commerce, customer support and enterprise software, while making new AI applications commercially viable.

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The idea isn’t unique to China. On Microsoft Corp’s earnings call last week, chief executive Officer Satya Nadella said AI models are becoming interchangeable inputs, suggesting that more value could accrue to companies that own customer relationships and software platforms rather than the models themselves.

Goldman Sachs Group Inc. believes China’s accelerating token growth, rising second-half capex, and increasing domestic chip supply reinforce its preference for cloud and data centres. Ronald Keung, the broker’s head of Asia Internet research, said in a Bloomberg TV interview on Wednesday that Chinese hyperscalers are best positioned, given their strong cash flows and ability to fund capex as they scale their cloud businesses. He estimates Alibaba Cloud grew 45% in the June quarter.

To be sure, there are reasons for caution. China’s technology sector has a long history of prioritising scale over profitability, and AI may prove no different. The internet giants that have their own AI models are also under growing pressure to defend their franchises against rivals, including DeepSeek, Z AI Co, Moonshot and ByteDance. Meanwhile, Alibaba, Meituan and JD.com Inc. continue to face a price war in the food delivery business and sluggish domestic consumer demand.

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For now, investors believe the rotation may have further to run because China’s cloud and internet stocks are only beginning to be re-rated as beneficiaries of falling AI costs after years of underperformance. Firm GPU rental rates also point to sustained compute demand even as token prices decline.

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