Investing.com -- Alibaba shares fell around 3% in U.S. premarket trading on Wednesday after Bloomberg reported that China is preparing to spend around 2 trillion yuan over the next five years building data centers to advance its domestic AI industry, sparking concerns that government-funded capacity could undercut private cloud operators.

The selloff reflected investor worry that state-backed data center buildout could weigh on pricing and future investment returns for private hyperscalers including Alibaba, Tencent, and Baidu.

However, analysts at Citi pushed back on that view, insisting the market’s reaction was overdone.

“We view these market concerns as premature,” the bank’s analysts said. “We believe this government investment should not be seen as a ‘zero-sum-game” for private hyperscalers like BABA, Tencent and Baidu.”

Citi’s argument rests on the assumption that government investment is likely aimed at broadening AI adoption among state-owned enterprises and smaller businesses that cannot afford the high cost of token usage.

If that is the case, the analysts said, government-funded capacity would largely serve that segment of the market, allowing Alibaba and other hyperscalers “to concentrate on higher-margin enterprise clients needing dedicated support and frequent AI-solution updates.”

Citi also pointed to a potential upside for Alibaba from the government program. Rather than building data centers entirely from their own capital, hyperscalers could increase the proportion of capacity they lease from government-funded projects, reducing upfront capital expenditure and freeing resources for investment in chips, models, and new solutions.

Because the government is investing in high-speed computing infrastructure and backbone network interconnections, Alibaba and peers could also benefit from lower transmission latency and bandwidth costs between their data centers and business nodes, the analysts noted.

They also believe it will take time for the proposed projects to raise enough capital to get off the ground, and that once completed, the new capacity could actually benefit hyperscalers by allowing them to shift toward leasing rather than self-building, freeing up resources for overseas expansion and research and development.

Citi maintained its Buy rating and $208 target on Alibaba shares.