China’s AI Boom Could Be the Catalyst for Its Cloud Industry

Could the AI boom boost the cloud sector?

Hi all,

Welcome back to AI Proem. As mentioned, I apologize in advance that updates will be less regular in the next three months as I need some time off to welcome a baby. In the meantime, I’m also working on a fascinating audio/video project that I will release here in Q4. So please stay tuned, and thank you for your patience.

CLSA’s latest China Internet: AI Superpowers 2.0 report makes a bold call: it says that with the explosion of AI applications, spanning everything from gaming to digital agents, China’s public cloud market could grow at more than 20% CAGR through 2027, reaching USD 80 billion. If true, that would be a huge win for the country’s leading providers—Alibaba, Tencent, Baidu, and ByteDance—who are building not just raw infrastructure, but “cloud-plus” services that bundle proprietary models, technology, and talent.

And my personal view is that it will benefit Alibaba Cloud the most, as this is exactly the trend Alibaba has been betting on. Among the BBAT / big four in China, it has leaned most aggressively into an enterprise-focused AI strategy, hoping to cement its position as the country’s number one cloud provider.

Beyond Infrastructure: What Clients Really Want

As we argued in earlier deep dives on Huawei and Alibaba, the next stage of the cloud race won’t be won on infrastructure alone. Enterprises don’t just need servers and compute, they need help training vertical models, building AI-driven applications, and customizing solutions for their industries. That’s where better technology and service become decisive.

As JS Tan put it in plain language: “IaaS is primarily designed for IT operators, while PaaS is built for software developers.” And it’s really in the PaaS + SaaS layers where the battle for AI cloud differentiation will play out, so in that sense, the SOE players like China Mobile and China Telecom might not be able to offer competitive service.

The AI App Race: Competition or Consolidation?

On the consumer front, the picture is more mixed. Doubao, DeepSeek, and Baidu’s Ernie are gaining traction, but they still lag far behind ChatGPT in terms of training scale and user adoption. The question is whether this market plays out like China’s earlier internet battles. We saw that with payments, ride-hailing, and food delivery, usually two players come out on top after multiple players fought bitterly before carving up market share, so that could be a scenario between the LLM players. Another scenario that could happen is that we may see big tech eventually swallow the most promising startups.

If Kevin Zhang is right, as in the LLM game is only for those with serious capital, then consolidation seems more likely. Especially, as MiniMax, Moonshot, and Zhipu already have financial or strategic ties to the BBATs.

Falling Costs, More Apps

At the same time, costs are collapsing. The mass adoption of Mixture of Experts (MoE) architectures since DeepSeek V3’s rollout has sharply reduced inference costs in recent months. Combine that with the flood of open-source models, and you get exactly what we’re seeing now: an AI application explosion.

Lower costs make it easier for startups and enterprises alike to experiment, and that experimentation almost always runs on the cloud.

China’s Catch-Up Moment?

Despite their head start in infrastructure build-out, Chinese cloud providers have long lagged U.S. hyperscalers, mainly because their businesses remained domestically focused/ constraint. As JS Tan has argued, this has limited their abitility to monetize abroad.

But this may be an inflection point. IDC projects global public cloud demand will grow at 26% a year to USD 626 billion by 2027, with penetration reaching 50%. China continues to court the global south to join its ecosystem, as seen in the recent announcement at WAIC. Then it can finally find a way to leverage its cloud technology for international growth, as well as export cloud services along with its growing AI influence.

Why This Matters

Well, in the report, CLSA’s thesis is simple but powerful. With lower inference costs and the widespread adoption of open-source models, China could end up producing the largest number of AI applications in the world. If that happens, the country’s public cloud providers will be the biggest beneficiaries.

For now, the U.S. remains ahead in both cloud and AI application adoption. But if China can find a way to scale its advantages and create the most demand for cloud through AI, as well as export its infrastructure, then there is a big chance these companies can capture untapped market share.

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Btw, a recommendation for the week is this Podcast interview with Kendra Schaefer, Partner and Head of Tech Policy Research at Trivium China, and Basilinna Senior Fellow, titled What is the Promise of AI?

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