Chinese Stocks Drop as Alibaba Rethinks Cloud Strategy Amid US Chip Limits

The biggest Chinese tech stocks fell across the board on Friday after Alibaba (NYSE: BABA) announced it would not spin off its cloud computing unit, citing recent AI chip restrictions imposed by the US government. The losses in the broader Hang Seng index were led by Alibaba itself, which fell 12% since Thursday. 

Alibaba Will Not Spin Off Cloud Unit

Alibaba Group revoked its decision to spin off and list its cloud computing unit through an IPO due to the adverse impact of recently announced chip restrictions against China by the Biden administration.

According to the statement, the e-commerce giant is no longer planning the demerger of its Cloud Intelligence Group, citing the uncertainty surrounding the supply of chips, which play a vital role in developing artificial intelligence (AI) services. 

“We believe that a full spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement.”

– Alibaba said in a statement.

The US government tightened its export restrictions of high-end AI chips to China amid deteriorating trade relations between the world’s two biggest economies. In addition to Chinese firms that buy US-made AI chips, the curbs are also expected to impact US companies, most notably Nvidia. In response to the move, China curbed the exports of key materials used to manufacture batteries and electronic devices. 

Meanwhile, Alibaba continues working on its in-house generative AI services, with the cloud unit central to this endeavor. However, restricted access to best-in-class AI chips could significantly hinder progress. This week, Nvidia announced the latest flagship graphic processing unit (GPU), the H200, which is also designed for AI use cases.

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Chinese Stocks Slide on Alibaba’s Spin-Off U-Turn 

Alibaba’s US-listed shares fell more than 12% since Thursday to $77, the lowest in nearly a year. 

The negative sentiment spilled into other Chinese stocks, pushing the broader Hang Seng index down by more than 2%. Alongside Alibaba, other tech giants that saw notable declines were Baidu and Tencent, which fell 4.9% and 3%, respectively. Tencent’s shares rose higher just a day earlier after it reported better-than-expected profit and revenue.

JD.com, Meituan, and the embattled Chinese property developer Country Garden also fell on the day, losing 2.4%, 4%, and 4.5%, respectively. 

Do you think chip restrictions could negatively affect Alibaba’s shares in the long term? Let us know in the comments below.