Commentary: How AI is Unlocking Opportunities for Businesses and Investors

The acceleration of investment in artificial intelligence (AI) technologies, such as DeepSeek, by companies including Alibaba Group signals a pivotal shift in the Chinese AI industry. The expansion within the AI sector is expected to transform the broader economy by affecting supply chains, altering demand dynamics, and adjusting pricing structures[para. 1][para. 2]. AI's potential for inducing long-term productivity increases can enhance economic growth by automating processes, fostering innovation, and compensating for labor deficiencies in an aging demographic. This, in turn, promotes efficiency, generates novel industry sectors, and redirects investments towards high-value areas[para. 3]. Analysts affirm that AI could boost annual potential GDP growth by approximately one percentage point, though its short-term economic effects are emerging more slowly. AI development remains largely in the research and development (R&D) phase, with its gradual adoption illustrated by U.S. Census Bureau data indicating a rise in AI technology penetration from 3.7% in October 2023 to 5.4% by February 2024. Projections estimate this growth will continue, reaching beyond 7% by 2025[para. 4][para. 5].

Despite its potential, the AI growth is primarily concentrated in the technology, finance, and healthcare sectors, with immediate economic benefits yet to fully manifest as tech companies increase AI-related capital expenditures[para. 6]. Overall, AI emerges as a significant economic growth driver, dismissing fears of prolonged economic stagnation and boosting confidence in pursuing high-quality development[para. 7]. China's potential AI-related capital expenditures by 2025 could range between 500 billion and 1 trillion yuan, based on estimates from Huatai Securities, aligning with American AI investment levels. Even conservative scenarios project AI-related spending in 2025 could contribute over 0.4 percentage points to GDP[para. 8][para. 9]. However, challenges like a heavy reliance on imported equipment and potential resource allocation conflicts with traditional industries may limit the domestic impact of AI investments[para. 10]. Nevertheless, AI spending is anticipated to enhance consumption, investment confidence, productivity, and economic opportunity through leveraging China’s engineering talent[para. 11].

AI's development distinctly affects corporate profitability across various AI layers. The hardware layer, encompassing chips and power infrastructure, benefits immediately from capital expenditures, while the software layer relies on valuation gains and faces longer R&D cycles. Low-cost models like DeepSeek could accelerate technological progression at the application layer yet lead to reduced hardware demand forecasts and subsequent disruptions[para. 12][para. 13]. Domestic substitution of hardware components is crucial for China’s leverage in the application layer, but more broadly, a recovery in corporate profits will depend on economic cycle improvements, supply-demand dynamics, and policy adjustments across sectors like real estate[para. 14][para. 15]. Two risks are noteworthy: concerns over returns on AI investments amidst rapid capacity expansions, potentially lowering prices and impacting profits, and the risk of overcapacity particularly in the short term, although underinvestment is more likely currently[para. 16][para. 17].

The current AI investment wave primarily relies on internal resources or equity markets, causing limited impact on the bond market compared to traditional sectors such as real estate. This may drive up costs for essential AI products like chips and servers, impacting price indices modestly. Over time, AI’s productivity enhancements could exert anti-inflationary pressures by reducing production costs and creating labor-market gaps, ultimately fostering job creation and economic growth[para. 18][para. 19]. The technology sector, supported by policy and liquidity, remains an attractive investment space with opportunities across computing power, infrastructure, AI applications, and traditional industry transformations. AI investments' impact on the bond market is moderated by their modest employment effects and growth expectations. Long-term, AI may benefit the bond market through potential anti-inflationary effects, while driving infrastructure demand and related commodity opportunities[para. 20][para. 21].