Will DeepSeek Make China the AI Superpower of the Future?

Archive edition · Market data and company circumstances reflect 22 February 2025, when this newsletter was sent.

Is DeepSeek the Key to China’s AI Dominance?

Over the past decade, China has firmly established itself as a technological powerhouse, investing heavily in artificial intelligence (AI) and machine learning. With rapid advancements in AI capabilities, particularly in generative AI, China is now on the verge of an economic transformation driven by automation, productivity enhancements, and industry-wide digitalization.

Recent developments, such as the emergence of DeepSeek as a global AI competitor, indicate that China's AI growth trajectory is accelerating faster than previously estimated.

Today, we explore how AI is reshaping China’s economic landscape, the potential productivity gains, and the broader implications for the labor market and investment cycles, as per Goldman Sachs.

The Economic Impact of AI on China

In 2023, Goldman Sachs projected that AI could raise China’s labor productivity and potential GDP by approximately 9%. However, after incorporating recent AI advancements and detailed industry-level employment data, the uplift estimate has been slightly revised downward to 8%. Despite this minor adjustment, the timeline for AI-driven economic growth has been accelerated.

China's AI adoption is now expected to provide a 0.2-0.3 percentage point (pp) annual uplift to GDP growth by 2030, compared to the previously estimated 0.1pp.

This shift underscores China’s ability to innovate, optimize AI models, and reduce the costs associated with AI training and deployment.

China’s AI Leadership: Surpassing EU and UK

China’s AI development has outpaced EU and UK.

China’s AI ecosystem has expanded rapidly, with the number of foundation AI models increasing to 20 in 2023, surpassing the combined total of the EU and the UK.

The rise of homegrown models, such as DeepSeek R1, has positioned China as a credible competitor to US-based AI leaders. This trend suggests that China’s AI adoption is likely to be more in line with developed markets rather than emerging economies.

The rapid expansion of AI applications in China signals a stronger and more immediate economic impact. A key driver behind this growth is China’s ability to scale AI solutions efficiently while reducing dependence on external technologies.

Industry-Level AI Adoption: China vs. the U.S.

One of the primary factors influencing AI’s impact on China’s economy is the composition of its labor market. Unlike the U.S., where a significant share of the workforce is engaged in highly automatable roles such as finance, insurance, and professional services, China’s labor force is more concentrated in agriculture, manufacturing, and construction.

As a result, China’s AI-related productivity gains are expected to be slightly lower than those in the U.S., where automation is more easily integrated into service-oriented industries. However, the upside remains substantial, with long-term gains expected as AI adoption increases across multiple sectors.

• In the US, only 19% of jobs are in agriculture, manufacturing, and construction.
• In China, these industries account for nearly 50% of employment, making them less susceptible to AI-driven automation.

AI Adoption Timeline

Previously, AI adoption in China was expected to follow a gradual trajectory, peaking in the mid-to-late 2030s. However, recent developments suggest a much faster adoption curve:

This accelerated timeline suggests that AI will start contributing to China’s economic growth as early as 2026, with significant productivity improvements materializing by the end of the decade.

• AI adoption rates in China are now expected to exceed 30% by 2030, compared to the previous estimate of 10-20%.
• Marginal AI adoption is now forecasted to peak in the early 2030s rather than the late 2030s.
• The technology is expected to reach near-universal adoption within the next 15 years.

China’s AI Investment Set to Reshape Economy

The rapid development of artificial intelligence (AI) in China is expected to drive a significant surge in AI-related investments, particularly between 2025 and 2027. Major technology players, including Bytedance, Baidu (NASDAQ: BIDU), Alibaba (NYSE: BABA), and Tencent (OTC: TCEHY)—collectively known as BBAT—are anticipated to substantially increase their capital expenditures to enhance AI infrastructure and model training capabilities. This wave of investment is expected to fuel advancements in large-scale AI models, cloud computing, and semiconductor development.

AI-related spending in China is projected to approach 1% of the country’s annual GDP in the coming years, underscoring the strategic importance of AI in economic and technological growth. As seen in other major markets like the U.S., AI investments are likely to follow a two-phase cycle: an initial wave driven by tech giants, followed by broader adoption across non-tech industries. This pattern has historically led to exponential gains in productivity and efficiency.

Beyond the tech sector, AI integration is expected to expand into industries such as finance, healthcare, manufacturing, and retail, further amplifying economic benefits. Companies in these sectors are likely to increase their AI investments to optimize operations, enhance automation, and improve data-driven decision-making. Firms like JD.com (NASDAQ: JD), Meituan (HKEX: 3690), and Ping An Insurance (HKEX: 2318) are already exploring AI applications to improve business efficiencies and customer experiences.

As AI applications become more sophisticated and widely integrated, non-tech firms are expected to ramp up investments, contributing to sustained economic growth. The evolution of AI in China is not just a technological shift but a fundamental transformation that will shape the competitive landscape of multiple industries, solidifying China’s position as a global AI powerhouse.

Archive note

This article preserves the analysis in our weekly newsletter sent 22 February 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.