AI Arms Race: US-China Debate Escalates Beyond Tariffs as Nations Vie for Global Influence

Hi, this is Evelyn, writing to you from Beijing. Welcome to the latest edition of The China Connection — a snapshot of what I'm seeing and hearing from local businesses.

As Chinese startups build new artificial intelligence models and more American startups use them, they're raising the stakes for U.S.-China relations.

China's role in AI is transforming rapidly. President Xi Jinping's AI speech on July 17 and the coinciding release of a Claude Fable 5 rival, Kimi K3, were just the beginning. The subsequent U.S. government pushback on Chinese open-source models has ignited calls against "premature restrictions," as articulated in an open letter from Nvidia's Jensen Huang and over 20 other tech companies.

"To me, the release of Kimi K3 has kicked off a hornet's debate in Washington about what to do about Chinese open-weight models," said Ryan Fedasiuk, fellow at the American Enterprise Institute.

This debate is poised to be tested at the highest levels. U.S. President Donald Trump announced plans to discuss AI with Xi during a visit to the U.S. in late September. China's foreign ministry responded by stating Beijing was ready to collaborate with the U.S. on AI.

The future trajectory of U.S.-China collaboration or rivalry in AI will be "very consequential," according to Lex Zhao, a Chinese-born venture capitalist and managing partner at Boston-based One Way Ventures. "The reality is that a lot of American startups use Chinese AI models. A lot of companies we invest in build on top of these models," he stated, emphasizing that both nations hold significant leverage over each other regarding AI.

This commercial interdependence is transforming a technological challenge for Washington into a diplomatic one. China has recently hosted major events like the World AI Conference in Shanghai and the APEC Digital Weeks in Chengdu, drawing significant international participation, including from U.S. tech officials.

George Chen, partner and chair of digital practice at consultancy The Asia Group, observed, "Now Beijing also views AI as a new kind of diplomacy to grab more allies and partners." The upcoming Trump-Xi summit presents a crucial opportunity for the leaders to address AI diplomacy matters.

China's technological strides in AI are notable, occurring despite four years of U.S. restrictions on advanced semiconductor access for AI training. However, the excitement surrounding powerful new Chinese models is still tempered by limitations in computing power. Startups like Z.ai are experiencing significant demand for their advanced coding tools, with waitlists stretching for months. Similarly, Moonshot paused new subscriptions for its Kimi K3 model due to computing power constraints.

China is investing heavily in domestic computing capabilities, with Z.ai reportedly ramping up a massive 1-gigawatt data center. Despite these efforts, recent AI model releases have led a growing number of Americans to believe China is more advanced in AI development than the U.S., according to a Pew Research survey. A separate Pew study indicated that roughly half of Americans disapprove of current U.S. policies on AI from both major parties.

The incident where U.S.-based Hugging Face had to utilize Z.ai's GLM 5.2 to counter a cyberattack highlights the critical need for open-source AI in the U.S. enterprise, a sentiment echoed by Fedasiuk, who advocates for a balanced approach rather than outright restrictions.

Even as U.S. companies accuse Chinese developers of intellectual property theft, advanced U.S. open-source models are reportedly using Chinese technologies like DeepSeek and Kimi in their development process. The APEC Digital Weeks in Chengdu saw representatives endorse open-source AI models that "employ strong security assurance." It remains uncertain whether policy discussions, even between the leaders of the world's two largest economies, can secure a definitive edge in the rapidly evolving AI race. Experts suggest that businesses benefit most from systems offering flexibility to switch between models, indicating that as Chinese AI models improve and proliferate, avoiding their integration may become increasingly challenging.

Geely to Manufacture EVs in Spain: Geely will produce electric vehicles at a former Ford plant in Spain through a new joint venture. The agreement includes plans for a new electric crossover for Ford, additions to the Bronco family, and two electric Geely SUVs, with production slated to begin in 2028. This move comes as China's automotive market faces its worst year since 2021, with slowing growth.

Slowing Industrial Profit Growth: China's industrial profits saw a slower growth rate of 15.1% in June compared to the previous year, down from May's 21.1% increase. Attention now turns to the upcoming Communist Party Politburo meeting, where economists anticipate signals for stronger easing measures following the second-quarter economic slowdown.

CXMT's Stellar IPO Debut: Memory chipmaker CXMT experienced a remarkable debut on the Shanghai Stock Exchange, with its shares skyrocketing 470% on opening day after raising approximately $8.6 billion. The company held a significant 7.67% share of the global DRAM market in 2025, based on recent sales figures.

July 30: China Politburo policy meeting expected

July 31: Official manufacturing PMI

Aug. 3: RatingDog China General Manufacturing PMI