China's Baidu soars 16% to hit 2-year highs amid positive signs for its AI business

Chinese tech giant Baidu saw its shares in Hong Kong soar nearly 16% on Wednesday as it increasingly focuses on its artificial intelligence-related business that has also led to a ratings upgrade.

Shares in the Beijing-based firm, which holds a dominant position in China's search engine market, had gained nearly 8% overnight in U.S. trading.

The strong stock performance came after equity research firm Arete Research Services lifted its rating on Baidu's American depositary receipts to buy from sell, based on a positive outlook for its AI chip and cloud-computing revenue.

Baidu has been aggressively trying to grow AI-related chip and computing business, which supports its popular large language model and AI chatbot Ernie Bot. 

To train its AI models, the company has started using internally designed chips, The Information reported last week, citing people with direct knowledge of the matter.

According to researchers from Arete, Baidu's growing chip venture has the potential to more than offset the impact from the company's struggling online advertising business.

Baidu, whose Hong Kong shares have gained nearly 59% this year, reported a drop in second-quarter revenue last month as its core advertising business struggled and returns from AI investments remained limited.

In addition to providing a new potential business venture, Baidu's chip drive could help it reduce reliance on AI chips from Nvidia, which has been subject to shifting export controls from Washington.

In other news this week, Baidu on Monday secured an AI-related deal with China Merchants Group, a major state-owned enterprise, focused on transportation, finance and property development. 

"Both sides plan to focus on applications of large language models, AI agents and 'digital employees,' vowing to make scalable and sustainable progress in industrial intelligence based on real-life business scenarios," according to Baidu's statement translated by CNBC.

As it seeks to gain an edge in China's competitive AI space, the company also disclosed a 4.4 billion yuan ($56.2 million) offshore bond offering on Tuesday. This follows a $2 billion bond issuance back in March. 

Other Chinese AI players, such as Tencent, have also been raising funds, including via debt sales this year, to support the billions being invested into their AI capabilities. 

Meanwhile, at a developer conference last week, Baidu unveiled a series of AI advancements, including the company's latest reasoning model, Ernie X 1.1.

According to the company, multiple benchmark results showed that its model's overall performance surpassed that of Chinese AI start-up DeepSeek's latest reasoning model. CNBC could not independently verify that claim.

Gimme Credit Senior Bond Analyst, Saurav Sen, said in a report last week that Baidu's recent capital allocations have revealed that the company is making an "all-in AI pivot."