China's tech crunch

China is powering ahead to dominate the hi-tech market. Will this be the new frontier of the US-China trade war?

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To celebrate the 120th anniversary of the birth of Deng Xiaoping, Chinese papers have been flooded with pieces commemorating his legacy. One of the most important leaders of the 20th century, Deng was decisive in changing the course of China’s – and the world’s – history, creating the environment that would lead the nation to become the superpower it is today:

Deng's sense of urgency in modernizing China through the implementation of reform and opening-up was palpable… China today is a global economic powerhouse, the second-largest economy, the largest manufacturing and trading nation, and the largest producer of about 200 major products, accounting for more than 50 percent of the global production for many of them.

– “Deng’s philosophy inspires Chinese modernization”, China Daily

It is this spirit, China’s thinkers of tomorrow believe, that spurs on today’s leadership, inspiring them to push the country forward and achieve the next stage of greatness:

“Yet the country's current leadership, like Deng, still attaches great importance to science and technology, as it considers sci-tech to be a main driver of future development. Accordingly, it has been investing handsomely in R&D in order to become a global leader in science and technology.

China is now focused on developing new quality productive forces, in order to achieve high-quality development and make breakthroughs in science and technology to benefit all of humankind.”

And indeed, China’s leadership seems to have its sights set on the next stage of development and economic domination: hi-tech innovation. From AI, to robots, to data, it seems that stories are coming out every week about China’s new strides in the tech space. But apart from splashy headlines, what concrete plans does the Party have to take tech to the next level? And if they do manage to achieve their goals, what does this mean for their already tense relationship with the US?

The gains

I’ll be the first to admit that I’m not the most tech-savvy, so when some of the big (and small) news pieces first broke, I was a little lost as to how momentous they really were:

“optoelectronic integrated wide-area deterministic network technology, is a key tech used in the country's east-data-west-computing project… The east-data-west-computing project sends data gathered from the more prosperous eastern regions of the country to less-developed but resource-rich western regions for storage, calculation and feedback.”

“State-linked Chinese entities are using cloud services provided by Amazon, to access advanced U.S. chips and artificial intelligence capabilities that they cannot acquire otherwise.”

On first read, stories like this mean almost nothing. But (from what I’ve gathered) they could mean China is able to make further leaps in its tech capabilities. China has been chasing faster internet and data transmission speeds for years, pushing forward to achieve a 6G technology that can be exported to the rest of the world. As for their use of Amazon Web Services (AWS), this is a workaround for the chip export ban from the US. “Providing access to such chips or advanced AI models through the cloud,” apparently, and virtual access to these tools will allow universities and science labs to push forward with the development of AI models, cloud computing, tech training programmes, and other ‘unspecified’ projects.

There were some less esoteric headlines that we can delve into here too. The World Robot Conference that took place in Beijing last week was an opportunity to show off futuristic domestic robot designs, as well as telegraph the Party’s priorities in the field:

“over two dozen Chinese companies showed off humanoid robots designed to work in factories and warehouses, with even more displaying the made-in-China precision parts needed to build them.

China's push into the emerging industry draws from the formula behind its initial EV drive more than a decade ago: government support, ruthless price competition from a wide field of new entrants and a deep supply chain.”

As always, China knows when to push its advantage. What it lacks in brains, it makes up for twofold in brawn, and the ability to pour endless resources into a venture, essentially brute-forcing it into working. At the conference, Premier Li Qiang apparently walked around, proclaiming that robot technology is an "important yardstick for technical innovation and high-end manufacturing strength," and stressing that emphasis should be put on the domestic market, as well as robotics applications in manufacturing, farming and services.

Home-use robots are still a bit sci-fi and likely more of an attraction than a current key focus, but the application of robotics in labour-heavy industries in the primary sector is incredibly important to China’s future. And the future of any nation with a dwindling working-age population. If China can dominate the market for working robots in factories and fields, then they will have once again made the world dependent on them as a levelled-up manufacturing superpower.

Blocking access to US technologies, too, only spurs development further. Just as preventing chip exports inspired Chinese researchers to access key data through cloud services, the blocking of OpenAI’s ChatGPT in China has spurred firms like SenseTime, Baidu, and Alibaba to scramble to catch up to the technology. All of these corporations, and other small companies, have come up with their own LLMs, with Alibaba purportedly creating the best language and maths LLMs on the market. The rapid growth of China’s AI market is quite remarkable, considering the relative lack of venture capital and other funding sources, as well as general computing power.

The gains, it seems, are a double-edged sword:

“China is estimated to have at least 130 large language models, accounting for 40% of the world’s total and second only to the US. But while US companies such as OpenAI have been at the cutting edge of generative AI, Chinese companies have been engaged in a price war that some analysts have speculated may harm their profit margins and their ability to innovate. Still, Winston Ma, a professor at New York University who writes about Chinese technology, said OpenAI’s departure from China comes “at a time when Chinese big tech players are closing on performance gap with OpenAI and are offering these Chinese LLM models essentially free”.”

However, China is no stranger to making losses in the short term to gain total market dominance in the long term. Wholesale retail giants like Alibaba and Temu are a testament to that model, and how well it works, despite the dangers it poses to both consumers and producers. 

The goals

But all these advancements could just be a flash in the pan. As always, this newsletter is interested in how the party-state conceives of China’s role in the field in the long-term, and how it plans to get there.

China is behind in hi-tech innovation for now because it lacks the highly skilled workers needed to make breakthroughs. But this is something the Party plans to change, as soon as possible. The departure of OpenAI, the blocking of chip exports to China, and the imposition of tariffs on Chinese EVs are the push Chinese companies need to innovate further, improve models and processes, and focus on quality over quantity. And this push is being filtered all the way down to educational and employment policy, as the Party sets its eyes on the long-term prize.

Chinese universities have responded to the Ministry of Education’s call to “adjust structures of university majors and talent-training schemes to better serve China’s modernisation” by abolishing courses such as animation, chemical engineering, and applied physics, and replacing them with courses in blockchain, integrated circuit design and cybersecurity, robotics, AI and big data.

“The call is coming from the top down. In recent years, President Xi Jinping has been pushing an innovation-driven economy amid competition with the United States, and seeking self-reliance in the face of Western sanctions that curb access to semiconductors.

In a speech in June, Xi said China needed to “seize the high ground”.”

These changes will take a while to come into effect, but clearly aim not only to plug the knowledge gap, but also solve the problem of youth unemployment. Of course, this would have to be accompanied by significant funding by the government and private sectors in these fields to absorb these highly skilled workers. This is clearly on the party’s agenda, as they’ve already announced that China is also aiming to become the global leader in AI by 2030:

“According to the State Council’s 2017 guidelines, AI should be used to promote China’s technology, economy and social welfare, maintain national security and contribute to the world. The guidelines also said: “AI should be applied in the public service and social management to build a safer, more comfortable and convenient society.”

From a regulatory perspective, China has taken a further step towards digitalisation and innovation. At the third Belt and Road Forum for International Cooperation, President Xi Jinping proposed the Global AI Governance Initiative for countries participating in the Belt and Road Initiative.”

The game

It’s clear that the party-state intends technological innovation to be the saviour of China’s economy, ensuring constant growth can be achieved and global economic domination ensured. As we mentioned in the previous newsletter, China’s economy is showing early signs of trouble, with export growth in decline and the global market becoming increasingly hostile in some quarters. Hi-tech industries will become a key cornerstone of China’s economy as stalwarts like steel manufacturing falter due to a decrease in demand. And the automation that some advancements will bring will solve future issues such as a lack of workers (though not the current issue of a lack of jobs for young people).

But in pursuing hi-tech at all costs, China will butt heads once again with the US, which sees itself as the bastion of all new inventions, and Silicon Valley as the only legitimate hub of hi-tech innovation. In their minds, China’s tech can only be second-rate at best or spyware at worst, and if the debate over banning TikTok shows us anything it’s that the guardians of the US fear China’s influence as much as its infiltration. If TikTok were a bad app that barely worked, then there would be less to worry about. But TikTok works entirely as intended: it’s addictive, it’s fun, and it wasn’t made by a US company.

Worst of all, if China comes to dominate the field of, say, AI, then it means that they will be able to outpace US companies in commercialisation, and therefore profit making. If China can create better, cheaper AI for the healthcare, military, and education sectors, then their models will dominate the market at the expense of more expensive American companies. While AI is just one (overhyped) example, it’s illustrative of the main issue on the horizon, one that is reflected in the US’ attempts to prevent China getting its hands on high-end computer chips.

Technology is the next battleground. At the moment, China may well be in the lead.