China's Tech Giants Signal the First Steps in a Bumpy Recovery

Eight months ago the future of China’s biggest internet companies was bleak. Even audacious China-based investors were scared by Beijing's strict tech regulations and the lockdowns of Covid's era. Alibaba, Baidu, and Tencent shares dropped to their lowest levels for several years.

The tech giants released their earnings reports this week, which showed early signs of recovery. The first financial reports since the end 'zero Covid restrictions' also showed the uneven pace at which China's economy is recovering. They also indicated that, while the transformations are underway, they will be difficult.

Baidu, China’s largest internet search company, and Tencent (owner of WeChat), the world’s most popular messaging app, have both seen double-digit revenue increases in the first quarter of this year compared to the same period of 2022. This is the first time they've reached that level in more than a year.

Baidu reported a 10 percent increase in revenue on Tuesday, stating that the strong digital advertising sales have continued into this quarter. Tencent attributed Wednesday's 11 percent increase in revenue to the rebound in digital payment as Chinese consumers started to spend again after a dry spell. Tencent, China’s dominant video-game company, also benefitted from the easing of restrictions on gaming licences last year, after a nine month freeze.

Alibaba announced Thursday that its revenue increased by 2 percent over the previous year, which was below analyst expectations. Alibaba's cloud computing and core online ecommerce divisions reported sales declines of single digits. However, online shopping started to recover in March.

These reports came after a turbulent period for tech companies in Beijing, which was governed by a tight regulatory regime. In 2020, after Jack Ma, founder of Alibaba, criticised financial regulators for stifling innovations, officials stopped the public offering by Ant Group, an Ant Group is a financial technology firm built by Mr. Ma.

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A top official from China's central banking said that the campaign against tech firms was "basically complete" in January, one month after China reversed its zero Covid restrictions due to public pressure. China's leader, Xi Jinping is hoping that the country's technology industry will provide a lifeline to growth. China, fueled by a escalating competition in the tech sector with the United States is keen to bring its beleaguered giants back to life.

Tian Hou is the founder of TH Data Capital in Beijing, a company that specializes in data analytics. The government wants to use internet companies to create jobs, innovate and catch up to the United States.

Investors' initial reaction to the first-quarter results of these companies was tepid. Hong Kong shares of Baidu, Tencent and both were relatively flat this week despite their recent gains. Alibaba's shares fell by about 6 percent on Friday but were down around 2 percent for the entire week.

China's economic growth will continue to be the main factor affecting fortunes of companies. Local governments are burdened with debt. Property, which was once a major driver of economic growth, has slowed down. Analysts were surprised by the April data released by China's National Bureau of Statistics: Chinese spent more on food but avoided cosmetics and automobiles. Youth unemployment hit a record high of 20.4%.

Bruce Pang is the chief economist at Jones Lang LaSalle's global real estate and financial advisory firm. He said that although people are on vacation, they are not spending as much money compared to pre-pandemic levels. They are cautious because of their low confidence about future income and job prospects.

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Alibaba is undergoing a major overhaul. In March, it announced a major restructuring that divided the company into six separate units. This week, it announced the spinoff of their prized cloud division. The company stated that this would be finished within 12 months in preparation for a public listing. After a series regulatory investigations, the e-commerce company said it was exploring an IPO for its grocery chain.

Alibaba's breakup, one of China’s most iconic corporations, shows the level of reassessment that is happening in the technology sector. China's Internet firms have grown as millions of Chinese began to go online. This migration has now reached a plateau, and businesses are fiercely competing for the same clients.

All three Chinese internet giants are trying to sell investors on a new story. This new story is based around artificial intelligence. It's the technology behind services like ChatGPT, which promises to disrupt old business practices.

Daniel Zhang, Alibaba's chairman, who will serve as the chief executive officer of Alibaba’s soon to be independent cloud unit, has described A.I. A.I. is a technology which will "reshape our society in every way."

Baidu's A.I. Cloud division posted its first profit in the last quarter.

In the first half of this year, Baidu, Alibaba, and OpenAI, a Silicon Valley-based research lab, unveiled ChatGPT, a system that is similar to ChatGPT. Baidu announced that it had asked for approval to proceed after China's cyberspace regulator released guidelines for A.I. In April, the Chinese cyberspace watchdog released guidelines for A.I.

Tencent's A.I. has seen 'good progress'. Tencent announced on Wednesday that it has made 'good progress' in developing its own A.I. The company did not provide any further details.

Companies are now concentrating their A.I. Chatbots that are popular with a large audience could threaten China's monopoly on information. Alibaba and Baidu both said that over 100,000 businesses had signed up to test their artificial intelligence products.

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Alibaba, Baidu, and Tencent have been undergoing major makeovers in a time of crisis. Beijing's control over the economy is more tight than ever. China's companies have been denied access to cutting-edge microchips needed to develop artificial intelligence systems due to intensified rivalry with the United States. Analysts say a lucrative group of domestic clients -- China's State-owned Enterprises -- is spurning cloud computing providers that are not government-backed in favor of private ones.

U.S. officials recently called for a review on Chinese cloud providers like Alibaba, citing national security concerns. Alibaba announced Thursday that the cloud business of Alibaba had declined in the last quarter, partly because a large customer had pulled out of its service internationally for 'non product reasons'

Some investors are hesitant to invest because of these difficulties in China and elsewhere, as they know that internet companies will not be able to reach the same growth rates from a decade ago. Some investors think that they are worth a second glance.

Kenny Wen is the head of investment strategy for asset management firm KGI Asia, based in Hong Kong. Now they're coming back, and we are seeing gradual improvements. We must give them a different evaluation standard.