Explosive Growth! Morgan Stanley: China's AI Cloud Market CAGR to Reach 72% Over Five Years, Alibaba Positioned to Be the Big Winner

Morgan Stanley believes that China’s AI cloud market (GenAI-related IaaS + MaaS) is experiencing explosive growth.

According to information from Wind Trading Platform, Morgan analysts predicted in a report on March 16 that driven by factors such as surging inference-side computing power demand and accelerated penetration of large model applications, China’s AI cloud market is expected to have a compound annual growth rate (CAGR) of 72% from 2024 to 2029. The market size will jump from RMB 15 billion in 2024 to RMB 218 billion by the end of 2029.

The share of GenAI in China’s total IaaS + PaaS market will rise from 6% in 2024 to 39% in 2029. AI cloud is evolving from a marginal player to the most core growth engine of the entire cloud computing market.

In this arms race for computing power, Morgan has listed Alibaba as the “top pick,” with an overweight rating and a target price of $180 in the US market. Morgan believes that Alibaba, with its full-stack layout—from self-developed chips T-Head, GPU infrastructure, Qwen large models, Bailian model platform, to 2C/2B application ecosystems—is the best candidate in China’s AI infrastructure sector, similar to Google’s position in the US market. Followed closely is ByteDance, whose subsidiary Volcengine is becoming the most disruptive new entrant in this space. ByteDance’s capital expenditure is expected to reach RMB 250 billion in 2026, surpassing Alibaba’s RMB 160 billion and Tencent’s RMB 130 billion.

More notably, Morgan believes that China’s cloud computing market is entering its first price increase cycle in 20 years. Morgan estimates that a 1% price increase by Alibaba Cloud could improve EBITA margins by 1 percentage point or raise EBITA forecasts by 11%. If overall contract prices increase by 10% (assuming 20% of contracts are renewed annually), EBITA margins could expand by 4 percentage points. This profit elasticity is a key variable that the market has not fully priced in.

Market Size: AI Cloud to Reshape China’s Cloud Landscape at 72% CAGR

Morgan cites IDC data indicating that China’s overall public cloud market (IaaS + PaaS + SaaS) will be about $45 billion in 2024, expanding to $105 billion by 2029, with a CAGR of 18%. Among these, IaaS is the largest component, accounting for 56% of the public cloud market; in 2024, IaaS market size is about $25 billion, expected to grow at 17% CAGR to 2029.

The expansion speed of AI cloud far exceeds the overall market. IDC forecasts that GenAI’s share in IaaS + PaaS will jump from 6% in 2024 to 39% by the end of 2029, becoming the core engine driving the performance acceleration of hyperscale cloud providers.

From the demand side, inference (Inference) is the true growth driver of the future.

IDC predicts that the share of training workloads in the GenAI IaaS market will drop sharply from 76% in 2024 to 23% in 2029, while inference demand’s CAGR will reach 103%, far exceeding the 26% for training demand.

The most intuitive data is from ByteDance’s Doubao Token usage: the daily token usage has surged from 40 trillion times in December 2024 to 500 trillion times by the end of 2025, an increase of over 12 times in one year. Additionally, MiniMax’s annual recurring revenue (ARR) increased from $100 million in December 2025 to $150 million in February 2026, a 50% increase, with token usage growing sixfold, partly benefiting from the explosive popularity of OpenClaw.

It is worth noting that China’s total public cloud market is currently only about 10% of the US market (based on 2024 data), with a significantly low cloud penetration rate. Morgan CIO survey shows that Chinese enterprises’ willingness to adopt public cloud within the next 12 months has risen from 58% to 71%, indicating substantial long-term growth potential for market penetration.

Competitive Landscape: Alibaba + ByteDance Forming a “Dual Oligopoly,” State-Owned Cloud Providers Under Continued Pressure

Morgan believes that the competitive landscape of China’s AI cloud era is undergoing a fundamental restructuring, with two clear trends:

Hyperscale cloud providers are regaining market share from state-owned enterprises.

From 2021 to 2024, telecom operators and Huawei have been gradually eroding Alibaba Cloud’s market share through aggressive pricing and securing state-owned enterprise clients. However, this trend has clearly reversed since the second half of 2024—Alibaba Cloud’s IaaS market share has rebounded from 25.5% in the first half of 2024 to 26.8% in Q2 2025.

Morgan attributes this to three main advantages: more innovative AI models, stronger supply chain resource access, and higher strategic execution efficiency of private enterprises. For example, in capital expenditure, since 2025, Alibaba, Tencent, and ByteDance have each spent over RMB 100 billion on AI-related investments, while telecom operators spent only about RMB 20 billion during the same period.

ByteDance is the most disruptive new player in the AI cloud era.

Volcengine’s GenAI IaaS market share has reached 14.2% (Alibaba Cloud leads with 23.5%), and its MaaS market share is even higher at 37.5% (H1 2025), making it the industry leader. ByteDance’s overall share in the public cloud IaaS market has rapidly risen from nearly zero before 2024 to nearly 4% by Q2 2025.

More notably, ByteDance is expected to spend RMB 250 billion on capital expenditures in 2026, surpassing Alibaba’s RMB 160 billion and Tencent’s RMB 130 billion. The private nature of these companies allows for more relaxed short-term profit margin requirements, supporting aggressive expansion.

In product matrix evaluation, Morgan assesses competitors across three dimensions: supply and capacity, product matrix, and service capability. Overall, Alibaba Cloud’s comprehensive advantage—covering self-developed chips (T-Head), foundational models (Qwen), and MaaS platforms (Bailian)—is most prominent; ByteDance is catching up in multimodal models (Seedance 2.0) and MaaS; Baidu, despite having a full-stack solution (Kunlunxin chips, Wenxin models, Qianfan platform), lags behind in market scale and model capabilities, leading Morgan to maintain a neutral rating.

Pricing Cycle: First Increase in 20 Years, Cloud Service Profitability Revaluation Approaching

Historically, cloud computing has been a deflationary industry—larger scale means lower costs and prices tend to decrease. However, Morgan points out that the AI era is breaking this paradigm, with an unprecedented price increase cycle brewing, marking China’s first upward pricing cycle in 20 years.

Global hyperscale cloud providers have already taken action: on January 4, 2026, AWS announced a roughly 15% price increase for machine learning EC2 Capacity Blocks (e.g., from $34.61 to $39.80 per hour for p5e.48xlarge instances); on January 27, 2026, Google Cloud (GCP) announced significant price hikes for network, storage, and AI infrastructure, with some CDN and data transfer rates doubling, effective from May 2026.

Signals of follow-up in China include: Wangsu Technology announced a 35%-40% price increase for CDN products starting February 1, 2026; UCloud announced price hikes for all contract renewals and new customers starting March 1, 2026; Tencent’s AI platform’s proprietary model prices increased by as much as 400%. Both companies cite supply chain inflation as a core reason for the price hikes.

Profit margin elasticity estimates are noteworthy.

Morgan estimates that, taking Alibaba Cloud as an example, a 1% increase in overall contract prices could improve EBITA margins by about 1 percentage point, raising EBITA forecasts by approximately 11% (assuming 20% of contracts are renewed annually with other conditions unchanged); a 10% overall price increase could boost EBITA margins by 4 percentage points.

Morgan also highlights two unique constraints in the Chinese market: First, ByteDance is currently prioritizing market share expansion, and its aggressive pricing strategy may suppress the overall industry’s pricing power; second, China lacks independent foundational model providers with extremely high compute demand like OpenAI, resulting in weaker pass-through of supply-side cost pressures to downstream pricing compared to the US.

Margin Improvement: Inference Wave + Self-Developed Chips + Depreciation Policies as Three Pillars of Marginal Enhancement

Currently, Alibaba Cloud’s EBITA margin is only in the high single digits (F24-25E), significantly lagging behind AWS (~35%), Microsoft Cloud (~40%), and Google Cloud (~23%). Morgan believes this gap will gradually narrow as the AI era progresses.

The core drivers are threefold:

Migration from training to inference workloads is the most important structural catalyst.

Inference workloads are billed per token/API, allowing for value-added services (VAS) to be layered on, and multiple workloads can be processed simultaneously on a single server (parallel batch scheduling), improving utilization and profit margins. In contrast, training workloads are more commoditized, with limited bargaining power.

Self-developed ASICs significantly reduce infrastructure unit costs.

Third-party AI chip vendors typically have gross margins of 50%-60% (at the chip level) and 60%-70% (at the server level). This means that Alibaba (T-Head) and Baidu (Kunlun) with self-developed ASICs can reduce procurement costs by over 50% compared to competitors, directly compressing inference costs.

Depreciation policy adjustments offer additional margin improvement potential.

US hyperscale cloud providers have extended server depreciation periods to 6 years, while Alibaba Cloud currently depreciates over 3 to 5 years. Extending depreciation periods in the future could lead to significant margin improvements.

All the above insights are from Wind Trading Platform.

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