In 2025, China's internet sector led the world with a staggering 36.5% return, but the real story will unfold in 2026 as artificial intelligence takes center stage.

According to a report released on December 1, Citigroup's "China Internet H1 2026 Outlook" highlights that competition in China's AI sector will revolve around three key themes: AI cloud infrastructure, AI chatbots, and AI applications. The report suggests that major players like Alibaba, ByteDance, and Tencent are racing to capture user traffic through their AI chatbots, aiming to secure critical gateways for ecosystem monetization in the AI era.

Analysts, including Alicia Yap, emphasize that this "user traffic battleground" will be pivotal for Chinese internet giants in 2026. Alibaba and Tencent are viewed as core AI investment targets, while ByteDance—with its rapid global expansion of AI applications—has emerged as a disruptive force. Its AI chatbot now ranks third globally in monthly active users (MAU).

Meanwhile, AI-driven productivity gains are expected to unleash greater demand for leisure and entertainment, benefiting stable-profit industries like gaming and tourism. Citigroup notes that due to geopolitical risks and AI supply chain constraints, Chinese internet firms may continue to trade at lower valuations than global peers.

**2026 AI Competition: Three Key Themes** The report predicts fierce competition in China's AI sector, focusing on three layers—not just a technological race but a battle for dominance in future commercial ecosystems.

1. **AI Cloud Infrastructure Capital Race**: Giants like Alibaba and Baidu are making massive investments. Over the past four quarters, Alibaba has spent approximately RMB 120 billion on AI and cloud infrastructure, with plans to invest RMB 380 billion over the next three years. Its cloud revenue grew 34% YoY in Q3 2025, while Baidu's AI cloud revenue rose 21% to RMB 6.2 billion. This "arms race" aims to provide computing power for the impending AI application boom.

2. **AI Chatbot "Traffic Gateway" Battle**: AI chatbots are deemed the "traffic gateways of the AI era," crucial for monetizing future ecosystems. Alibaba (with "Tongyi Qianwen"), ByteDance ("Doubao"), and Tencent ("Hunyuan"/"Yuanbao") are aggressively competing for users. ByteDance's "Doubao" leads domestically, hitting 197 million MAU by October 2025.

3. **Vertical AI Agent Adoption**: Companies like Meituan, Trip.com, and Didi are leveraging proprietary data to train AI agents, aiming to prevent disruption by general AI while boosting user engagement. For instance, Trip.com's AI travel assistant "TripGenie" saw user growth exceed 200% YoY in H1 2025.

**AI Global Expansion: ByteDance Breaks into Top 3** As domestic competition heats up, Chinese AI applications are accelerating overseas expansion. Citigroup highlights rising global penetration, with ByteDance's Dola ranking fourth worldwide (47 million MAU) alongside DeepSeek (39 million MAU). Combined with "Doubao's" 197 million MAU in China, ByteDance's total AI chatbot MAU reaches ~250 million, securing third place globally—a "key milestone" reflecting growth potential in emerging markets like Latin America and Southeast Asia.

**Performance Review & Outlook: AI Boosts Productivity, Benefits Gaming & Tourism** In Q3 2025, 27 of 44 internet firms beat profit estimates, attributed to cost optimization and AI-driven productivity gains. Looking ahead, AI tools are expected to free up consumer time and spending power for leisure. Two sectors stand out:

- **Gaming**: AI enhances development efficiency (e.g., art design, content generation) while maintaining robust profitability. China's gaming ARPU rebounded to RMB 41 in H1 2025 (+13.3% YoY), with innovations like AI NPCs in NetEase's "Justice" gaining global attention. - **Tourism**: Demand remains resilient, with 2024 tourism spending at 4.3% of GDP (below 2019's 5.7%), signaling growth potential. International flight passenger volume recovered to pre-pandemic levels in Q3 2025.