Commentary: How Will DeepSeek Change China?

The recent release of the artificial intelligence (AI) model by the Chinese startup DeepSeek has gained remarkable global attention, crucially impacting the industry and stock markets worldwide[para. 1]. This has boosted China's national confidence significantly, with an analysis by Aletheia Capital highlighting that searches related to DeepSeek on Baidu outranked even those for the Lunar New Year celebrations[para. 2]. China, over recent years, has been making strides in technology, often in competition with the U.S. Yet, these advancements had not always touched everyday life. In contrast, DeepSeek is described as a key disruption in the large language model market, indicative of future technological progress. This achievement comes despite the tight restrictions on technology exports imposed by the U.S. and other Western nations[para. 3].

Unlike expansive semiconductor projects that receive robust government backing, DeepSeek's development was notably achieved with minimal government funding[para. 4]. Politically, this surge in national confidence might afford the Chinese government greater leeway in confronting challenges posed by the U.S. government[para. 5]. Furthermore, DeepSeek promises to fast-track AI development and its associated industries domestically. Although not the most advanced AI model globally, the existence of a cutting-edge, open-source AI model within China is significant, even as U.S. embargoes might temper the pace and capabilities of its updates[para. 6].

DeepSeek's presence is anticipated to encourage domestic firms in China to invest more confidently in AI applications, covering areas like healthcare, high-end manufacturing, entertainment, and education. This expansion could generate significant data crucial for further AI model development and training, especially given China's aging population and steady income growth[para. 7]. Historically, owing to U.S. technological restrictions and substantial capital requirements, many large Chinese companies have hesitated in this domain, but DeepSeek's success could galvanize investment[para. 8]. As for talent, DeepSeek might incentivize more young Chinese individuals to enter the AI field, recognizing that talents often venture into related startups[para. 9].

Moreover, DeepSeek's advancement could signify a paradigm shift within China's scientific research ecosystem. It might compel more companies to not just follow established technologies but to engage in fundamental research across various arenas and strive for frontier breakthroughs[para. 10]. Interestingly, the roots of this breakthrough extend from a hedge fund focused on quantitative trading, underscoring the importance of interdisciplinary contributions toward economic and technology progress[para. 11].

Though advances in AI augur well for China's long-term economic and societal growth, the immediate economic impacts remain modest. The realization of China’s economic growth targets through to 2025, aligned with moderate inflation, will rely significantly on the performance of the real estate and consumer sectors[para. 12]. On a capital market perspective, Chinese markets, both on the mainland and in Hong Kong, presently lack large AI-centric companies unlike the U.S., with major Chinese platforms and semiconductor manufacturers not holding much AI-based premium valuation[para. 13]. Nevertheless, Chinese businesses, especially those with substantial user data, might become proactive in AI investments due to DeepSeek's influence, potentially sparking escalated interest in AI stocks in a year or two, depending on market alignment and whether such AI investments fundamentally affect these companies[para. 14].