Morgan Stanley warns that unconfirmed plans for China to invest RMB2 trillion in data centers through state-owned telecom operators could trigger severe oversupply.
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Morgan Stanley warns RMB2 trillion data center plan risks oversupply
Morgan Stanley warns that unconfirmed plans for China to invest RMB2 trillion in data centers through state-owned telecom operators could trigger severe oversupply.
China's potential RMB2 trillion data center investment through state-owned telecom operators would create severe oversupply and inflict significant damage on the industry, Morgan Stanley said, though the broker cautioned the reports remain unconfirmed.
"While the market has focused on infrastructure capacity, the biggest bottleneck in China's AI development lies in chipset production and design, not data center construction," Morgan Stanley's research team said in a note.
The broker suggested the reports may stem from a government policy interpretation released in January 2024 that referenced RMB2 trillion in spending — but that expenditure was tied to network construction among data centers, not direct investment in building them. The distinction matters because network construction connects existing facilities rather than adding new capacity, Morgan Stanley said.
If the investment proceeds through SOE telecom operators such as China Mobile, China Telecom and China Unicom, the resulting capacity glut would pressure margins across the data center industry. Operators including GDS Holdings, VNET Group and Kingsoft Cloud would face heightened competition from subsidized state-owned capacity, potentially compressing pricing and utilization rates.
The warning comes as China's cloud market undergoes a structural shift. Alibaba Cloud, the country's largest public cloud provider with roughly 34% market share, competes directly with data center operators for enterprise workloads. A surge in government-backed capacity could blur the line between wholesale colocation and public cloud services, Morgan Stanley said.
On the chip supply side, the broker's assessment aligns with broader industry consensus that export controls on advanced semiconductors — particularly Nvidia's H100 and H800 GPUs — constrain China's AI ambitions more acutely than data center availability. Chinese AI companies and cloud providers have turned to domestic alternatives from Huawei's Ascend series, though performance gaps persist.
For investors, the key question is whether the RMB2 trillion figure represents a genuine policy shift or a misinterpretation of existing plans. If confirmed, the investment would mark a dramatic escalation in state involvement in an industry already grappling with overcapacity concerns. GDS Holdings trades at roughly 1.5x forward revenue, while VNET Group trades near 0.8x — valuations that already reflect significant competitive pressure.
Morgan Stanley maintained that without official confirmation, the reports should be treated with caution. The broker's base case remains that China's data center buildout will proceed at a measured pace, constrained by chip availability rather than construction capacity.
This article is for informational purposes only and does not constitute investment advice.
