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

Eight months ago, the future of China’s largest internet companies looked grim. Covid-era lockdowns crushed sales and Beijing’s harsh tech regulations had spooked even audacious China investors. Shares of Alibaba, Baidu and Tencent dropped to some of their lowest levels in several years.

With China’s economy now reopen, the tech giants this week released earnings reports that showed initial signs of recovery. But the financial results, the first issued since the end of “zero Covid” restrictions, also reflected the uneven pace of China’s economic rebound and signaled that the companies’ makeovers, while underway, are likely to be rocky.

Baidu, China’s leading internet search business, and Tencent, owner of the ubiquitous messaging app WeChat, both recorded double-digit revenue growth in the first three months of the year over the same period in 2022, marking the first time in over a year they had reached that level.

Revenue rose 10 percent at Baidu, which said on Tuesday that strong digital advertising sales had continued into the current quarter. Tencent on Wednesday attributed its 11 percent revenue climb in part to a rebound in digital payments as Chinese consumers began to spend money again after a long dry spell. Tencent, China’s dominant video game company, also benefited from easing restrictions on gaming licenses last year after a nine-month freeze.

On Thursday, Alibaba reported that revenue rose 2 percent compared to the year prior, below analyst estimates. Its core online e-commerce division and cloud computing unit reported sales declines in the single digits, though online shopping began to rebound in March, the company said.

The reports followed a turbulent two years for tech companies under Beijing’s tight regulatory grip. After Alibaba’s founder, Jack Ma, criticized financial regulators in 2020 for stifling innovation, officials halted the public offering of Ant Group, a financial technology company built by Mr. Ma.

In January, a month after China abruptly reversed its “zero Covid” restrictions under public pressure, a top official at China’s central bank said the campaign against tech companies was “basically complete.” China’s top leader, Xi Jinping, is now hoping the country’s tech industry can provide a lifeline for growth. And spurred by an escalating tech competition with the United States, China is eager to nurture its beleaguered titans back to life.

“The worst time policy-wise for them is over,” said Tian Hou, the founder of TH Data Capital, a data analytics company in Beijing. “The government now wants to use these internet companies to create more jobs, innovate, and catch up with the United States.”

The initial investor reaction to the companies’ first quarter results was muted. Shares of Baidu and Tencent were roughly flat this week in Hong Kong, though both have rallied since October. Alibaba’s stock fell roughly 6 percent on Friday, but was down about 2 percent for the week.

The companies’ fortunes will remain tied to China’s economy. Local governments are saddled in debt. The property sector, long a stimulant of growth, is sputtering. Data released by China’s National Bureau of Statistics for April underwhelmed analysts: Chinese were spending more on food, but appeared to avoid items like cosmetics and cars. Youth unemployment reached a record of 20.4 percent.

“People are going out on holiday, but they’re not spending compared to prepandemic levels,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle, the global real estate and investment advisory firm. “They’re cautious because they have low confidence in job prospects and future sources of income.”

Alibaba is in the midst of a dramatic overhaul. It announced a major reorganization in March that split the company into six units. And this week it announced a spinoff of its prized cloud division, which the company said would be completed within 12 months to prepare for a public listing. The e-commerce giant also said it is exploring a public offering for its grocery chain and logistics arm, after a series of regulatory probes held up many promising tech firms from going public.

The breakup of Alibaba, one of China’s most iconic corporate empires, showcases the level of reassessment happening in the tech sector. For years, China’s internet firms swelled as millions of Chinese went online. Recently, that migration has reached a ceiling, and companies are competing intensely for the same customers.

All three of China’s big internet companies are hoping to tell investors a new story, one pegged to artificial intelligence, the new technology underlying services like ChatGPT that are promising to unseat old ways of doing business.

Daniel Zhang, the Alibaba chairman who will also serve as chief executive of Alibaba’s soon-to-be independent cloud unit, described A.I. as a technology that will “reshape every aspect of our society.”

The companies are hoping that investments in artificial intelligence will pay off for their cloud computing units, a technology that underpins A.I. services. Baidu said its A.I. cloud division reported its first profit last quarter.

Earlier this year, Baidu and Alibaba unveiled artificial intelligence systems similar to ChatGPT, which was developed by the Silicon Valley research lab OpenAI. Baidu said it had requested approval for the go-ahead after China’s cyberspace watchdog released guidelines for the A.I. systems in April.

Tencent has made “good progress” on its own A.I. model, the company said on Wednesday, with teams planning new A.I. offerings, though it did not elaborate further.

The companies are focusing their A.I. services on enterprises or businesses — in part because chatbots with mass appeal could disrupt China’s firm hold on information. Alibaba and Baidu each said that more than 100,000 enterprises had lined up to try their artificial intelligence products.

Alibaba, Baidu and Tencent are engaged in makeovers at a difficult time. Beijing’s grip on the economy is tighter than ever. Intensified rivalries with the United States have deprived Chinese companies of the access to some cutting edge microchips necessary to develop the most advanced artificial intelligence systems. And analysts say that a lucrative pool of domestic customers — China’s state-owned enterprises — are spurning private cloud-computing providers in favor of government-backed alternatives.

Recently, U.S. officials have called for a review of Chinese cloud providers such as Alibaba on national security grounds. Alibaba said Thursday that its cloud business declined last quarter in part because a major customer had backed out of its international service for “non-product reasons.”

Those difficulties, both in China and abroad, are keeping some investors away, knowing that the internet companies are not likely to return to the growth rates they had a decade prior. Others think they deserve a second look.

“I would suggest to forget the past,” said Kenny Wen, head of investment strategy at the asset management company KGI Asia in Hong Kong. “Now they are coming back and we’re seeing gradual improvement. We need to give them a new evaluation standard.”