Chinese internet giant Tencent Holdings is cutting prices for cloud services by up to 40% from June amid similar moves from rivals that have plunged the sector into a price war.

The fierce competition comes amid soft corporate demand, with the Chinese economy in the midst of a wobbly recovery since abandoning strict COVID-19 restrictions last year.

Alibaba Group Holding Ltd said last month it will slash prices for some cloud products by up to 50%. State-owned China Mobile also joined Tencent on Tuesday in announcing cuts, saying prices for some services would be reduced by up to 60% for a limited time.

Charlie Chai, an analyst at 86Research, said Chinese cloud service providers had in the past made efforts to avert a price war but “at the end of the day they still went down this path”. He noted the companies had expanded aggressively and now had too much capacity.

Wei Yunfeng, a researcher at data firm IDC, said the price war was also being driven in part by high sales targets despite slowing growth for the market.

Chai added that a more challenging cloud market will force companies to focus on product differentiation and that Baidu was well positioned as it had “unique, AI-centric products”.

“For participants that choose to join the war, the near-term margin impact can be significant,” he said, estimating it could take 4 to 7 percentage points off their cloud operating profit margins. Alibaba’s cloud revenue accounts for about 9% of its total revenue. Tencent does not break out separate figures for cloud revenue.

Tencent on Wednesday marked a return to revenue growth in the first quarter as it recovered from COVID-related disruptions and a regulatory freeze on gaming licences a year earlier. Alibaba reports on Thursday.

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