CNBC’s The China Connection newsletter: A rival AI strategy

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy. Like what you see? You can subscribe here.

China is taking a lean and mean approach to artificial intelligence as the tech rivalry with the U.S. intensifies.

In the U.S., companies and policymakers are chasing massive investments. OpenAI has warned it will need $115 billion through 2029, while Washington has made splashy announcements — including billions of dollars in domestic pledges by Apple and Meta.

Beijing, in contrast, is spending less and focusing on practical use cases. At the start of the year, Beijing discreetly launched a 60.06 billion yuan ($8.42 billion) national AI fund, and in recent weeks has rolled out sweeping plans to integrate the tech across the economy and society — part of a wide-ranging initiative called “AI+.”

China is “consolidating its energy to do something big,” Shan Zhiguang, a director at the State Information Center, a government-affiliated policy think tank, told reporters Tuesday.

Even if China lags behind in advanced chips, the country is on a different path versus the U.S., which Shan sees as pursuing human-level artificial general intelligence.

China’s chips are “usable,” Shan said, and that’s sufficient. He oversees the information and industrial development department.

Just this week, the government announced plans to integrate AI into the power grid and coal sector. That builds on a broader plan released in August to promote AI across six priority areas, from industry to consumption and international cooperation.

So far, U.S. restrictions on China’s access to Nvidia’s best chips haven’t stopped DeepSeek and other local companies from producing competitive — and often cheaper — generative AI models.

“China’s approach to the AI tech race is characterized by resourcefulness and adaptation,” said Clifford Kurz, director, S&P Global Ratings. “While currently lagging in advanced hardware, China is leveraging its significant financial resources, talent pool, and existing infrastructure to overcome these hurdles.”

Kurz expects China’s $8 billion AI fund to focus initially on China’s AI chip production, although official details are still scarce.

The AI fund’s main shareholder is the National Integrated Circuit Industry Investment Fund III, which is backed by China’s Ministry of Finance, China Development Bank, China Tobacco and several state-owned banks, according to Chinese business database Tianyancha.

“It’s like the Chinese version of the White House AI action plan of the U.S.,” said Winston Ma, adjunct professor at NYU School of Law. “The AI race is on.”

Whether or not through the AI fund directly, state capital has been flowing into Chinese startups.

For example, humanoid startup X Square Robot counts state-backed giants CDB Capital and CAS Investment among the backers for its latest investment round, according to Chief Operating Officer Yang Qian. X Square Robot on Monday released an open-source AI model for robotics, and announced a raise of around $100 million led by Alibaba Cloud.

While foreign investment in Chinese startups has slowed, local government-backed funds have already ramped up their investments in companies working in hardware, a sharp pivot from the app and software-heavy investments of earlier years.

It’s a story that has played out in China before – of government policy encouraging investment and providing subsidies. In electric cars, it seems to have worked, despite even Beijing admitting more than 1 billion yuan was wasted in corporate fraud.

China’s early semiconductor ambitions weren’t so successful. More than a decade ago, McKinsey pointed out that one of the Chinese government’s earliest attempts to build the chip industry since the 1990s “had mixed results because funding plans and incentives were focused more on research and academia than on business.”

Another attempt at a national semiconductor policy in 2014 fell short of the most ambitious targets, particularly in high-end technological capabilities and complete self-sufficiency.

Ostensibly, China’s tech investors and developers have come a long way since then.

Today, more than 40% of U.S. firms in China say local rivals are ahead in AI adoption, according to an AmCham Shanghai survey that wrapped in late June. Chinese search engine giant Baidu on Tuesday also announced AI tools geared toward senior citizens.

However, analysts are warning about problems stemming from overbuilding.

“Our focus is more on the risk of the overcapacity of AI infrastructure, including AI chips and upstream supply chain (e.g., data centers) as we believe that AI progress is driven by innovation on algorithm, not infinite compute,” said Zerlina Zeng, Head of Asia Strategy, CreditSights, referring to how smarter algorithms can make the same hardware go further.

“This was evidenced by DeepSeek’s success in delivering a competitive foundational model with constrained access to advanced chips,” Zeng said.

Even before DeepSeek or OpenAI were on the map, China laid out its AI ambitions in a 2017 policy, aiming to become the world’s AI innovation center by 2030.

With five years to go, the jury is still out on whether China can succeed. But it may be that the third time’s the charm.

Andy Rothman, founder of Sinology, said that there is an increasing sense of optimism about China’s economy.

AmCham Shanghai’s president shared how multinational companies can better position themselves to do business in China amid mounting uncertainty.

John Rutledge, Safanad’s chief investment strategist, joined “Fast Money” to talk about Chinese exports to the U.S. plunging and what is ahead for Chinese trade.

Exports to the U.S. plunge by 33%. China is instead selling more to Southeast Asia and Europe, but the U.S. drag still meant China’s overall exports last month grew by their slowest since February.

Chinese EVs descend on Europe. At the IAA Mobility show in Germany, Xpeng CEO He Xiaopeng told CNBC the company plans a global launch next year of its mass-market Mona brand — which has been a major boost to domestic deliveries already.

Former China securities regulator probed. Yi Huiman is under investigation, authorities said Saturday. Chinese business news site Caixin, citing sources, said it’s a corruption probe likely linked to the state-owned bank ICBC.

Mainland China’s CSI 300 was up 0.21%, closing at 4,445.36. Hong Kong’s Hang Seng Index advanced 1.04% while the Hang Seng Tech index was up 1.82%.

Consumer prices in China fell 0.4% year over year in August, according to data from the National Bureau of Statistics released Wednesday, missing expectations of a 0.2% drop by economists polled by Reuters.

Meanwhile, the producer price index fell 2.9% year over year, in line with expectations and improving from the 3.6% drop in July.

Hong Kong-listed shares of Alibaba Group rose 2.1%, after hitting a near-four-year high earlier in the session. This comes after Chinese humanoid startup X Square Robot announced that it had secured around $100 million in a funding round led by Alibaba Cloud.

— Nur Hikmah Md Ali

Sept. 15: China reports retail sales, industrial production and investment data for August.