China will lose AI war with U.S. – Chinese scholars

China will lose the AI war with the United States, because it is behind in computing, talent, open information and debate and market demand.

That is the judgement of two prominent Chinese academics at the Stanford Center on China’s Economy and Institutions at Stanford University – Guo Di (郭迪) and Xu Chenggang (許成鋼) – in an essay published in mid-December by Project Syndicate. Here is an edited summary.

The United Nations Trade and Development estimates that the global AI market will reach US$5 trillion by 2033, with average annual growth of about 31 per cent. The International Monetary Fund has predicted that the technology could boost global GDP by four per cent over the next decade, with the United States gaining as much as 5.4 per cent.

Chinese startup DeepSeek’s release of a highly competitive chatbot caused a sensation in early 2025. It prompted analogies to the Soviet Union’s launch of Sputnik in 1957.

“Technically, advances in AI rest on three foundational elements: compute, algorithms, and data. Among these, compute (raw data-processing power with advanced chips) is arguably the most fundamental, since it determines the capacity to invent and develop algorithms and generate or process data.

“The compute gap between the leading US and Chinese large language models is staggering. At the national level, the US controls about 75 per cent of global AI computing power, compared to China’s 15 per cent. The gap continues to widen as AI compute scales up exponentially in the US, while China’s compute remains severely constrained by export embargoes and a lack of funding.

In cloud platforms, the US dominates. In the second quarter of 2025, Amazon Web Services, Microsoft Azure, and Google Cloud together held about 63 per cent of the global market. Chinese providers held only eight per cent, with Alibaba Cloud at four per cent and Tencent Cloud and Huawei Cloud both at two per cent.

“The damage that DeepSeek’s debut did to Nvidia’s valuation lasted only a few days. Hard evidence showed that US frontier models continued to improve substantially by following the scaling law.”

The U.S. is also ahead in talent. “While many of the most talented AI researchers are Chinese – constituting a significant share of leading AI teams in the US – it is exceedingly rare, if it has happened at all, for major international AI awards to be granted to researchers whose breakthroughs were achieved at Chinese institutions. This might not matter too much if essential breakthroughs remain open-source, and cross-border mobility continues. But, with Sino-American relations assuming more of a Cold War-like character, disruptive breakthroughs are unlikely to be shared, and China – hampered by compute restrictions and limited mobility – could fall permanently behind.”

On data, the US benefits from a substantially larger collection of publications – especially in science and technology – and internet text, not least because these sources are overwhelmingly in English. Though China does excel in surveillance and mass video collection, its reliance on censorship, political control, and bureaucratic silos tends to undercut data quality and shareability. “In terms of pursuing world-model breakthroughs, high-quality multimodal datasets – health-care, industrial, and physical-world data – are essential, and the US has the advantage.

“While China has made rapid advances, its structural constraints remain significant. Industrial revolutions are always driven by both supply and demand. Wealth and strong demand for successive innovations are indispensable. That is why industrial revolutions have occurred only in advanced economies operating under democratic capitalist systems.

“With the world’s highest per capita GDP and correspondingly high labour costs, the US generates strong demand for automation across all sectors, including in research and development itself. It is these macro fundamentals that have underpinned such strong performance in US AI stocks.

“By contrast, China’s economy has been trapped in a vicious cycle of weak demand, overcapacity, high unemployment, and persistent deflation, which is fundamentally incompatible with any industrial revolution. AI-led automation offers no remedy for such problems, which are rooted in the country’s institutional foundations. The massive government borrowing used to finance China’s bid for AI and chip dominance has only deepened concerns about its already severe debt burden and chronic soft budget constraints – problems reminiscent of what the Soviet Union faced during the Cold War arms race.”

“OpenAI reports that it has surpassed 800 million weekly active users worldwide for ChatGPT, and most of these users showed up after the ‘DeepSeek moment’. In terms of revenue, OpenAI has reached US$12 billion, and all leading US AI companies have been growing at 300 per cent annually.

“Meanwhile, China’s leading models – Baidu’s Ernie Bot, Alibaba Qwen and Deep Seek have so far attracted 10-150 million monthly active users each, mostly within the domestic market and often at very low prices or for free. Compute restrictions will remain a major headwind for Chinese AI models seeking a global user base, especially when one also considers issues such as a lack of trust, insufficient funding, and geopolitical constraints.

“Sustained innovation requires free institutions and robust demand. Breakthroughs come when entrepreneurs and scientists are empowered by independent courts, supported by risk-taking private investors, and tested through open debate and market competition. In Communist Party-controlled China, demand is suppressed because the state controls key resources that limit household income and entrepreneurial initiative, and capital is funnelled into state-directed projects rather than open-ended discovery and innovation … AI is not a remedy for deflation – and deflation itself is fundamentally incompatible with any industrial revolution.”