The U.S. vs China AI Battle Is Getting Ugly

James Kynge

Now we've got the White House accusing China of industrial-scale theft of intellectual property from US AI labs. This is different. And on the China side, we've got the Chinese government banning the acquisition by one of America's biggest companies, Meta, of a promising AI company that was founded in China but is now based in Singapore. All of this, to me, means the rivalry has entered a new phase.

Alice Han

Welcome to China Decode. I'm Alice Han.

James Kynge

And I'm James Kynge.

Alice Han

In today's episode, we're discussing the tightening and increasingly combative race for global AI supremacy, why US banks are scooping up Chinese currency in offshore markets, and the growing industry of pretend-to-work offices in China. That's all coming up — but first, a quick check-in on how the Chinese markets are starting the week.

On Monday, the markets opened with slight gains: the Shanghai Composite closed up 0.16% while the Shenzhen Component was up 0.37%. Industrial profits jumped 15.8% in March year-on-year, with enterprise profits growing over 15% in Q1. That growth comes in spite of the shocks from the war in Iran, and is largely attributed to the booming AI and chip industries in the mainland — high-tech manufacturing alone saw a 47.4% gain in profits in Q1. Standouts included Morefun, up 8.5%, and SMIC A-shares, up 5%; FiberHome and Leyard were both down over 12%. Tech giants were mixed, with Tencent down 3% and Baidu up 3.5%. All right — let's get into it.

Alice Han

As the US and China barrel towards a high-stakes summit next month, the fight over artificial intelligence is getting a lot more aggressive and a lot more complicated. China has announced it will prohibit foreign investment in Manus, a Singapore-based AI company with Chinese founders, which means Manus's December acquisition will have to be undone — a move experts say could deter other Chinese entrepreneurs from seeking foreign partners. Meanwhile, the White House has accused China-backed actors of running industrial-scale campaigns to siphon off the capabilities of American AI labs, querying systems millions of times to replicate how they work. It's hard to prove definitively, but if true, it suggests the global AI race isn't just about innovation — it's about extraction. And just as those accusations ramp up, DeepSeek has rolled out a powerful new model, built cheaper and released open-source, quickly closing the gap with US leaders.

James, we talk a lot about AI on this podcast, and with good reason. Some of the recent news suggests an escalation in this AI conflict — and it's not just driven by Washington and Beijing. I was just in China for three weeks, and I detected real consternation about AI competition, and about the politics of Silicon Valley. Is AI going to be perceived broadly as a threat — not just by American legislators but by Silicon Valley too?

James Kynge

Welcome back from China, Alice. As far as I see it, this is pretty big. We've got what I'd call a Cold War curtain coming down over the US–China competition over AI. Until now there's been a lot of rivalry, but mostly commercial rivalry: OpenAI's ChatGPT in late 2022, then the first DeepSeek moment in early 2025, with both sides going strongly, fuelled by money and enterprise. But now the White House is accusing China of industrial-scale theft of intellectual property from US AI labs — and China is banning Meta's acquisition of that promising AI company. Politically, geopolitically, this is a step change. US law-enforcement agencies are limbering up to really get moving on the AI frontier with China.

So what is distilling? Essentially, a Chinese AI company sends hundreds of thousands or millions of prompts — probably from proxy accounts, through VPNs to camouflage their source — to a US large language model. It collects and collates all the replies, and that lets it develop a sense of the US model's decision-making patterns, its reasoning, its confidence levels. It effectively maps the algorithm behind the target model. To give China their say: they call the US claims entirely baseless, a slanderous smear against the achievements of China's AI industry. But whatever the truth, both sides are getting more acrimonious. What's your sense, Alice?

Alice Han

Putting aside Trump's likely trip to China next month, I sense pressure from OpenAI and Anthropic to get Washington to crack down on China distilling US models — both companies have long harped on the threat to national security and to the US AI lead. But even though many analysts and technical experts are pushing for more export restrictions to obviate distilling, right now Trump seems to be in the mode of summiting, trying to extract some kind of deal.

The Chinese side are optimistic about the meeting even if nothing substantive comes out of it — they believe the mood music will be positive, that Xi will visit the US in the second half of the year, and that the two could also meet at APEC and the G20. In total we could see four meetings across the year. My base case is that both sides, Washington in particular, want to be seen making a deal. This friction will continue in the background, but I don't think it will be front and centre — because what matters most is that Trump clearly wants a big win coming out of Beijing.

James Kynge

That's really interesting. I get the sense there's a disconnect between the diplomacy — particularly ahead of Trump's planned visit — and the reality of the deep state in both countries becoming more and more wary, putting on more controls, talking about more sanctions. The DOJ is actively prosecuting individuals smuggling advanced Nvidia servers into China. The Commerce Department is investigating companies like DeepSeek for their use of restricted American chips. And there's proposed legislation such as the Decoupling America's Artificial Intelligence Capability from China Act — not law yet, but it threatens up to 20 years in prison and millions in fines for engaging with specific Chinese AI technology. So there's a lot going on in the background. Trump may be out front making nice, and the mood music around the summit may be friendly, but the true trajectory of the relationship continues to be bad.

Alice Han

One thing I'll end on — raised at a conference I attended in Beijing — is the use of AI in military applications. There's real concern on Beijing's side about autonomous weapons, of the kind used more recently in Iran. That could resurface; it was part of a strategic dialogue rehashed towards the end of the Biden administration. In the bull case, if the summit goes well, it could pave the way for more dialogue on autonomous-weapons controls — but I'm not holding my breath.

Alice Han

While Washington warns about China stealing the future of AI, Wall Street is quietly buying into China's financial present. US banks, led by Goldman Sachs, are borrowing record amounts in renminbi through a booming offshore market known as dim sum bonds. The reason is simple: it's cheaper, with lower interest rates and massive demand from Chinese investors. And it's bigger than bond markets — it's part of a broader push to internationalise the currency and chip away at the dollar's dominance, with global institutions increasingly playing along.

This is an interesting one for me, because I deal a lot with clients. Any time you meet the PBOC, they're really trying to sell you on both panda bonds — the onshore renminbi bonds — and dim sum bonds, the offshore ones sold through Hong Kong. Purely economically it makes sense: with Chinese ten-year government yields around 1.75%, and inflation risk to the upside elsewhere, Chinese bonds keep looking attractive for lower borrowing costs.

James Kynge

My sense is that this is certainly a signal of something. When Goldman Sachs — the symbol of American capitalism — is issuing Chinese debt in renminbi in the middle of a US-led war against Iran, it has to be a signal. But of what? I've been puzzling over it. I don't think it's yet a sign of the decline of the US dollar; the dollar is in pretty good shape and US financial markets are unbelievably strong. It's probably something simpler: issuing in dim sum bonds is much cheaper. Goldman paid roughly a 3% coupon on its ten-year dim sum bond; in America it would have paid about 5 to 5.7%. I also think it's a move to show cooperation and commitment to the Chinese government — China likes foreign companies issuing these bonds, because it deepens the offshore market and signals China's rising status. So there's a nod to Beijing there too. Do you think the US will be looking at Goldman and wondering why they're issuing bonds over there?

Alice Han

I wouldn't say no to that being a risk, given the Trump administration's scattergun attention. But in general it isn't a risk to the dollar, despite issuance of dim sum bonds doubling year-to-date versus the same period in 2025. More investors are getting interested for structural reasons, but this doesn't displace dollar dominance, which derives from its share of global FX reserves, trade invoicing, and loans. On all those metrics the dollar is so much larger than the renminbi that it'll take a while to close the gap.

It does point to one principle I flagged over a year ago, when the yen carry trade began to unwind on higher inflation expectations and rising rates. Traditionally investors borrow cheap yen and invest in higher-yielding assets, pocketing the difference. With that unwinding, the renminbi has replaced some of that structural role — though this is marginal compared with the real table stakes: how much the renminbi grows in global trade and FX reserves. Since Trump 2.0, it has been creeping up in reserves and in trade invoicing, notably with the Russians and increasingly in the Middle East. It's still a long game, and China is some way behind. Worth noting: two ships were recently paid in renminbi for safe passage through the Strait of Hormuz — an indication of the direction of change in bilateral payments between Iran and China.

James Kynge

So the renminbi is becoming more of an international currency, but still very far from a threat to the dollar's dominance. Is that fair?

Alice Han

I completely agree. Investors worried about the trajectory of America — fiscally, politically, militarily — do a risk-off and look to China, thinking the risk premium is lower and the regime more stable. They're suffering less on the energy front, thanks to generous price caps to support the economy, and the PBOC is unlikely to touch rates, especially before the summit — probably staying around the 1% level, considerably lower than the rest of the world. James, to give people a sense of scale: how big is the dim sum bond market relative to peers in the US and Japan?

James Kynge

At the moment the dim sum bond market is about 260 billion US dollars — roughly 1.8 trillion renminbi. That's tiny compared with the US bond market, which is roughly 60 trillion dollars. So it's a small market, but it's growing quickly, and I think it's going to become more and more significant.

Alice Han

While China races ahead in AI and expands its financial footprint, a very different story is playing out on the ground. Across cities from Shanghai to Shenzhen, a strange new industry has appeared: pretend-to-work offices, where young people pay something like $7 a day to sit at a desk, take meetings, and send photos home to prove they have a job. On one level it sounds absurd, but it's a window into a deeper problem — a tough job market for young people, and a culture where unemployment still carries real shame. Instead of sitting at home, some choose structure, routine and, frankly, dignity, even if it's staged. At the top, China projects strength — cutting-edge AI, a rising currency, global ambition — but underneath, a generation is struggling to find its footing.

James, watching some of the videos of these offices, my first, slightly facetious reaction was that it's a bit like WeWork back in the day — people coming into co-working spaces, arguably working. Digging deeper, there's a company called, I believe, Hangzhou Pretend to Work Ltd, run by a Mr Chen, and a lot of the people there are freelancers and content creators. So maybe it's not fair to say they're all faking it — new jobs really have been created in these spaces, mainly in the influencer and content-creation realm. What's your take?

James Kynge

People were talking about this when I was in China recently, and my sense is rather similar to yours. It's not a full pretence. A lot of people go because everyone there knows they haven't got a job and would like one — they're almost advertising their joblessness. Obviously some are pretending to work. What struck me is how widespread it is: you find these offices in Beijing, Shanghai, Shenzhen, Taiyuan, Dongguan, cities all across China.

It reminds me very much of the time I spent in Japan in the early '90s, when you'd find salarymen who'd lost their jobs getting up every morning, putting on their suit and tie, and going to a local library to sit there all day — because they felt too ashamed to admit it to their family. I didn't get the same sense of shame here, but there's a little of that. And there's some humour, too: in one Beijing office there was a door marked 'chairman's office', but when you opened it you found only the fire escape — a play on the fact that the chairman doesn't exist. The reason we chose this topic is that it shows an angle on one of China's biggest social and economic problems: how hard it is for 16-to-24-year-olds to get jobs. The latest figure is 16.9% of that cohort unemployed in March, and based on my conversations, I wouldn't be surprised if that number really starts to rise now. You must have heard similar things on your trip, Alice.

Alice Han

What I heard is that Beijing has been pressuring universities to add degrees by year, so students stay on campus a little longer, and pushing state-owned enterprises to run internships to get some youth into the workplace. Gen Z in China are really struggling to find a job, and that has broader cultural and sociological implications. We've talked before about tang ping — lying flat, not being aggressive or ambitious about work — and this pretend-to-work culture somewhat fits into that: people want to cosplay working, but don't really want to, or fail to, go out and find a real job.

What was interesting is that the Global Times even acknowledged the trend, in a piece last August titled 'Chinese urban freelancers turn to pretend-to-work offices for disciplined spaces' — spinning them largely as a positive mode of employment for a new generation of freelance and content-creation workers, while listing some of the fraud risks towards the end. It all comes together in the feeling that traditional jobs are no longer growing — in fact many are being lost in manufacturing and, increasingly, in stable white-collar sectors including SOEs. For people unfamiliar with China's digital ecosystem, there's an enormous amount of content creation out there: full-time creators and live-streamers selling products; farmers using Kuaishou to sell direct to market. The positive side is that people are finding alternative work in this new digital, AI-driven era. The negative side is that it's another indication that structural unemployment really exists — and is worsening.

Alice Han

All right, James — it's prediction time. As you peer into the future this week, what do you see?

James Kynge

I couldn't resist going back to the dim sum bonds. My prediction is that by the end of 2030 the market will be worth more than 10 trillion renminbi, up from about 1.8 trillion now — more than a fivefold increase. This is effectively China's offshore renminbi market: foreign companies can issue bonds in renminbi there, and foreigners can buy them. Its size is nothing compared with the US Treasury market or the Japanese government bond market, but it's significant, and it's going to grow quickly.

Alice Han

Mine is about inheritance laws and wealth transfer. The Economist had a really good piece on how we're soon going to see the biggest transfer of intergenerational wealth in China's history — by some estimates at least $2 trillion. Given the one-child policy that was largely in place until 2016, consider the implications for a next generation inheriting all those assets. My prediction is that we'll see some form of inheritance-tax or capital-gains-tax legislation, because central and local governments are chomping at the bit for more fiscal revenue and there needs to be more tax reform. A property tax is unlikely now, given how deflated the property sector still is, but the five-year plan mentioned researching inheritance and capital-gains taxes. So I foresee legislation on that in the next couple of years — which would be really interesting, because it's the first time we've seen anything like it in recent memory in China.

Alice Han

That's all for this episode. Thank you for listening to China Decode, a production of Prof G Media. Make sure to follow us wherever you get your podcasts so you don't miss an episode. Talk to you again next week.