How China Wins The AI War

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tops all the performance benchmarks and the G2 leader board, and it comes with a million dollar

guarantee. Check it out at fin.ai. Today's number? 15. That's the percentage of Americans who say they'd be willing to take a job where their direct supervisor is an AI program. We're not sure if that tells us how good American AI has gotten or how bad American bosses are. If money is evil, then that building is hell. Welcome to Profty Markets. I'm Ed Elson. It is May 7th.

Let's check in on yesterday's market vitals. The major indices extended their rally on reports that the US and Iran were reviewing a deal to end the war and gradually reopen the state of Hormuz. That news also sent Brent crude tumbling. Treasury yields also dropped in while AMD stock sword nearly 20% after the chip maker beat expectations and raised its guidance. Okay. What else is happening? Chinese AI startup DeepSeek is targeting a $50 billion

evaluation in its first ever fundraising round. Leading the financing is China's biggest state-backed semiconductor investment vehicle known as The Big Fund, the country's goal, build a full stack AI ecosystem that can rival the United States. DeepSeek first grabbed Wall Street's attention last year with R1, a powerful model that was built at a fraction of the cost of leading Silicon Valley LLMs. And last month it released V4, a model that is now competitive

with top US players on a number of benchmark. So here to discuss DeepSeek and the state of the US versus China AI race we are speaking with our friend, Alice Han, director at Green Mantle and co-host of the China decode podcast Alice. Thank you for joining us again. I kind of want to

start with the valuation here $50 billion because at first glance, it seems quite low when you compare

it to anthropic, which is trading at a trillion, Apache BTO, but now I'm also trading at a trillion on the secondary markets. These companies are ready to go public. And then I also know that this is an extremely powerful model. It's extremely popular. It's the leading model in China. So I guess that number $50 billion strikes me as small, I guess, would you agree? And then also, what else strikes you about this news? I probably agree, Ed, but this is a feature not a bug of

Chinese valuations. Even if you look at Chinese tech companies historically, the valuations at the Ford P's much lower than what you see in the Mag7, what you see in the US. This is a feature of Chinese capital markets, just not being as developed as they are in the US. And more importantly, in terms of the fundraising for deep seek itself, yes, there will be some private fundraising,

“but it's a largely, I think, going to be state-led as opposed to what you're seeing in the US”

with the anthropics and the open-air eyes of the world. So I think it's completely reasonable and within the bounds of what I expect that this valuation is, you know, orders of magnitude lower than what we're seeing in the States. More importantly, I think when you look at the capabilities, what has been interesting is that it is now announced deep seek before that it can do a 1 million token context window. This is comparable to Gemini and what we're seeing out of anthropic and

open-air eye. But there's a big, big questions moving forward about the hardware side of things which we can get into. Will deep seek be able to access via Huawei and elsewhere the kind of chips that needs to continue to power its models? Well, this is that is exactly where I would like

Jensen Huang and Dwarkash Pateau as a podcaster who had Jensen Huang on his program. And they were

“talking about China and the fact that Nvidia has been selling chips to China and it got quite”

heated and it really pressed on this exact issue of should we be selling chips to China if they're

going to use those chips and use them to develop extremely powerful LLMs and AI models. Let's just

play the clip and get your reaction. The day that deep seek comes out on Huawei first, that is a horrible outcome for our nation. Why is that? Because I mean, currently, you can have a model like deep seek that can run on any accelerator. Why would that stop being the case in the future? Well, suppose it doesn't supposed to optimize for Huawei, supposed to optimize for their architecture. It would put ours at a disadvantage. You described the situation, a company developed software

developed an AI model and it runs best on the American tech stack. I saw that as good news. You set it up as a premise that it was bad news. I'm going to give you the bad news that AI models around the world are developed and they run best on not American hardware. That is bad news for us. So I guess this the striking thing here is one is how uncomfortable Jensen Huang appears to be

when he gets this question about China. This is the first time I've seen him as defensive as he

wasn't in this exchange. But it does get to the heart of that question. Should we be selling ships to China and also where are we in that stage? Because we know that the policy has gone off on off on. We keep on changing our minds if you could just dive into all of that for me. Yeah. Well, first I have a big fan of both Jensen and Dorgascia and I listen to that very

“attentively very recently. I would say just to break it down a little bit. What is important”

is that Huawei is a said 950 P.R., which just came out and it's been powering the deep sick V4. The big by companies like by Dad's Barbara Tencent and I rush into all of these ships. These are inference ships. So just looking at the stats alone, they can perform better on inference by 2.87 times more than the existing and video chips that can be sold to China. These are the age 20s, not the age 200s. Although those have been approved, China hasn't allowed those

imports as of yet. And secondly, they improve the multimodal generation efficiency by 60%. So just looking at what is available from and video compared to Huawei, apples and oranges, Huawei is doing better on the inference side of things. But if you compare that to the age 200s, if you compare that to the Rubens, Huawei is still great deal behind. But it seems like Beijing is trying to prioritize a domestic ecosystem, a domestic marketplace of inference chips,

such that it will no longer have to rely on an Nvidia. So basically, exactly what Jensen Huang expressed as his big fear to Dorgascia, which is that if you continue to push China with, for instance, this chip export controls, the chip equipment, export controls are just recently have been announced against Hua Hong, which is a major Chinese semiconductor company. Then you incentivize across the supply chain, trying to say, hey, we are not going to import your next

generation, although there will be outdated of chips we want to prioritize what is coming out of Huawei and SMIC. Now, what does that mean for Chinese AI companies? It means that, yes, to some extent,

“the performance will be behind what you see in America. But the way that I think about it is that”

it creates good enough alternatives. China is prioritizing inference and inference is still an open game in terms of the chip making capabilities. Yes, Nvidia is really the king when it comes to the training side of the chip infrastructure, but it's still unclear whether or not it can be the winner when it comes to inference chips. And here, I think the Chinese companies like Huawei and SMIC could really give Nvidia a run for its money in the long term, but right now Nvidia is the

clear, leader, a lot of US companies like Broadcom, AMD or so clear winners. The last thing that I will end on is that currently there isn't enough chips being produced domestically by Chinese chipmakers to meet the demand on compute and inference. And that is going to be in the short time, the biggest

bottleneck China ordered these Chinese companies rather ordered 2 million H200s earlier this year,

because they were so much demand for its AI models. None of that has been approved obviously by Beijing right now Huawei saying that it can do 750,000 units of its Ascent chips. If you just look at the numbers alone and if you even look at sort of the longer-term statistics on how many chips

able to produce 2% of what Nvidia and TSMC can produce in 2027 by looking just to compute outputs.

“That is I think huge, but right now the political priority trumps what is efficient and the”

political priority from Beijing is to kickstart a domestic ecosystem that will be able to rival Nvidia long term. So just going back to some of those chips that you mentioned there. So you got the Nvidia H20, which was the chip that was essentially designed to be a Duma slower chip than the highest end that is created by Nvidia. That was designed for China and you're telling us Huawei's now

got a chip that is three times more powerful on the inference perspective, almost three times more powerful.

So they're not interested in those H20 chips so much anymore it seems, but still significantly behind the H200 and the Ruben and those are Nvidia's really fantastic chips and they're still behind on that front. I guess the question then becomes like how far behind are they and also how quickly have they improved recently because Huawei, I mean it was a name in the AI world, but not that big of a name and suddenly it seems to be gaining a lot of momentum and a lot of

steam as an observer I'm reading about it a lot more. I mean are they getting close to a point where

“they could actually rival Nvidia's most advanced chips, which we do not allow to go to China?”

They're not yet close, but there are smart work runs. So firstly on the training front obviously there's a lot of news about Chinese AI companies distilling models coming out of Anthropic and OpenAI. That helps them. It's almost as if it's a student cheating on an exam and it's just copying a smarter student, right? This is what is allowing them to really catch up on the inference front and the inference is really you know when a student having a lot of the information takes the exam

so it even adds us to the queries that you give to say an LLM or to an agent. Here Chinese models are actually doing extremely well and I think the long time bet is that if a Huawei can produce a lot more in terms of chips it can do these clusters and you may have heard of this idea of this cluster architecture. So for instance if Huawei chip is 10 times less compute efficient then an Nvidia chip may be you cluster 10 of them equally equivalent of an Nvidia. That I think will be the

long term bet. A lot of it rides on how much capacity Huawei and Smith can do right now and this

connects to Iran. There is a real risk that helium for instance which is critical for chip making

is actually going to be a bottleneck and a headwind for Chinese chip makers. Another thing that could be a headwind is if the US decides it's actually going to do more restrictions on chip equipment. China's even more relying actually on the chip equipment providers like EMD for instance and ASML if there are more restrictions there that could again set back China's domestic chip production. We'll be right back after the break and by the way we are heading out on tour at the end

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pieces of leverage? Or I guess all of the different races would be the right way to describe it. I mean you've got compute capability. America's winning on that front it seems.

“You've got energy, you've got supply chain, you've got, I think access to the straight-of-home”

moves seems to be increasingly an important piece of this. And when you think about all of the different fronts on which the AI war is being waged on which of them is China winning against America and on which of them is America winning. So I think about it as a five-layer cake and in this regard I was happy that Jensen Huang was ahead of similar framework from upstream to downstream.

So we start from the upstream which is going to be basically the rare earths that are used

for instance that power semiconductors and data centers. This is what China has huge dominance. We've seen that as a blaster as well with the export restrictions. The second layer that we're going to look into is the energy layer where China again has it seems an electricity front a great deal of leverage. It has twice the amount of electricity output that the Americans have. That is going to be bottleneck for American data center rollout as well moving forward.

Number three is the data center infrastructure layer where the U.S. has done exceptionally well. China will only get to 60 gigawatts it's targeting by 2030. The U.S. is basically already there as of now. And then the fourth layer is going to be the models themselves where again, you know, based on the status quo right now, the U.S. is still leading although that gap has at a times closing because Chinese models are getting more efficient. They are distilling and improving

at a rapid pace. And then it's the application layer where I actually think it's a bit of a mixed bag. China is making really interesting applications. This is why meta wanted to buy and fail to

“buy and manage its agentic AI that came out of mainland China and moved to Singapore. I think”

there will be really interesting applications coming out of China, especially on the agentic front. They could rival what you see in America. It's not just an LM game and that China has proven that. So I see it as a five-layer cake right now. It's really mixed across the board. But China tends to dominate on some of these upstream as opposed to downstream. You mentioned manners there, which this company that meta was trying to buy as a Chinese company,

or I guess a Singapore-based company but as Chinese roots and then Beijing banned it, which seems to sort of lend itself to the argument that this is becoming quite a hostile race. It's fully a competition. If America tries to get access to stuff that's happening in China, as it relates to AI Beijing will ban it. They will stop it. Same thing is true over in America. An analogy that I am increasingly hearing when it comes to the AI race is that it's sort of

like getting your hands on a nuclear weapon. This is more and more relevant. The more we hear in the headlines. I mean, I'm throw up at coming out with mythos and we learn that there's this AI technology that could hack every single cyber security system in the world. It could literally bring the infrastructure, the digital infrastructure, or the nation to its knees. It's seeming more and more that maybe it's a fair comparison, but I don't know, maybe it's a

“bridge too far. Do you think that that is a reasonable analogy when it comes to the AI race?”

Just to clarify, you're an analogy in particular you've referring to it. The nuclear weapons. The nuclear weapons. You know, Kissinger before he passed away a couple

years ago, wrote a book as you probably know with Eric Schmidt. And in which he basically said

that AI and autonomous weapons was going to be what nuclear weapons were during the Cold War

he in the last few years of his life went to Beijing to speak with Xi Jinping and high-level officials

to set up the framework for strategic dialogue, which Biden did take up towards the end of his administration. A strategic dialogue between Beijing and Washington on AI arms controls. Now, there's an open-ended question as to whether or not when Trump meets with Xi next likely next week in Beijing if there is going to be a kickstart to that discussion and use strategic dialogue will emerge. But I was just in Beijing last week, Ed and what was very

starting to me was the level of fear as to how effective US AI technology has been in its application in the Iran conflict. There was a lot of concern as well about the use of clod by the Department

of War, by defense community in America. And when Mithus came out, I've seen a

combination in China about what that means for Chinese national security. One thing that I will end on is that this is part of the reason why China has tried to make AI not just an economic issue, but also a national security issue. It also also made quantum and national security issue too. Quantum is also going to be key for decryption and encryption to your point if there is going to be a mythos that can hack into every system. Quantum may be able to leap

“frog that and create a new fortress. So these are all these ongoing concerns, but I think the”

view from Beijing right now is that there needs to be high-level strategic discussion. I won't be surprised if after this meeting between Trump and Xi, there is a revival from the Beijing side about ongoing strategic dialogue concerning AI weapons because right now things do look very scary from China's vantage point. Just going back to the the Dwarkash, Jensen Huang, and to view. I mean, it seemed like there was sort of this miscommunication in the

dialogue where on the one hand, the argument is being made to Jensen Huang that if AI is a nuke, if it is comparable to a nuke, you shouldn't be selling equipment that they are going to use to go and build that nuke and therefore nuke America. And then he's saying, no, they're already going to they're already building it. They have the ability. So do they do we want them to be using U.S. made equipment or do we want them to be using China made equipment? Which I feel like

didn't quite get to the heart of the disagreement and something I was thinking about this and I'd like to hear your thoughts. I mean, running with the nuke analogy, China has nukes. Yeah. They haven't dropped them on the U.S.

“And the reason they haven't dropped them on the U.S. I think is because they don't want to be”

assured distraction. Mutually assured destruction. And so to me, I just it seems as though this question of the AI race between America and China, increasingly it's not actually about the technology, it's about diplomacy. And it's about the relationship between the two. And it's about getting us to a place where China doesn't feel that there is any reason to drop the AI equivalent of a nuclear bomb on America. And it seems to be that that's the trajectory where this is headed.

This is a political discussion, not a technological one. I just be interested to get your thoughts on that and how this topic is kind of evolving. I love that question. As I was listening to that podcast, it was clear that neither of them were historians or politics majors. As they were purchased a question, because as you know, China built with no American help. It was largely Soviet aid, and then they had engineers, physicists who came and built it by 64, they surprised the world,

by launching a successful nuclear test in China. That shows you historically that China can

“in this AI-H created its own AI capabilities without American largely support or input. I think”

what they confuse is this question can in the meantime Wall Street monetize the China's AI development. Clearly, Jensen has an incentive to make that case, which benefits parts of America. But regardless of that argument, China will find a way to create a rival AI system. If that AI system is antagonistic or not, that question, and its answer, resides on your point, Edward Czech Republic agree, is there going to be continued strategic dialogue and diplomacy? Kissinger understood this,

and he was hopping on about it, even towards the end of his life. And I think it will be very,

very sad and ultimately tragic for humanity if we don't have Washington Beijing continued discussion

there isn't track to diplomacy where these Chinese tech companies are also involved,

“because you also need experts in their room to help both sides assess the capabilities.”

My concern right now is those two sides, both on the expert side, as well as on the diplomatic side of very far apart. And that, as Kissinger rightly predicted in his last book on AI, is going to create massively tragic outcomes that we have yet to see more far greater than we have yet to witness in our lifetime. But if we do ultimately come to a point where there is mutually assured destruction in AI, then we may be able to achieve equilibrium. But that rests on both sides

having extremely strong and telegraphed AI capabilities. Alice Haun, directorate Green Mantle, co-host of the China D-code podcast Alice, Trump and she are likely to meet next week. Maybe we'll get some answers when that happens. Thank you so much for joining us. Thanks so much Ed.

“Here's a question for you. Is AI making us dumber? That is the question our research lead”

Mia Sylvario asked in one of her recent substacks, and our findings were pretty conclusive.

The answer is yes. According to Dr. Jared Horvath, a neuroscientist who recently spoken

front of Congress, every generation in history has been smarter than their parents' generation except for Gen Z. Young people underperform on quote every cognitive measure from IQ to literacy to basic memory skills. One look at the data will confirm that this is indeed true. Roughly half of the American 12th graders are now scoring below a basic level of math, and roughly a third of them don't have basic reading skills. In fact, that is the worst rating

that we've seen among that group in three decades, but it isn't just America. Over the past two decades, science, math, and reading scores among teenagers in high-income countries have all fallen nearly 5%. Meanwhile literacy rates for adults have fallen roughly 3% in sum. Yes, we are literally getting dumber. Now is this just because of AI? No. As Mia points out, there are other factors, such as social media addiction and also the pandemic, which stunted learning for millions of

children around the world, but we should also acknowledge the extent to which AI is still playing a role here, and the fact that it actually is accelerating the trend. One study found that students who use AI tools for homework assignments experience a 55% reduction in overall brain activity, which means that when you use Chachi BT, your brain is actually more impaired, more suppressed, than if you were to be twice over the legal alcohol limit. However, unlike alcohol where your brain

can actually recover over the long term, the impairment effects of using AI appear to compound even after the AI tool is removed from usage. In other words, every student in America is effectively operating as if they were a drunk driver. So will AI make us more productive, as a society, probably, but will it also make us dumber as a society? Certainly, in fact, it already has.

“If you want to read more about this, you can go check out Mia's work at substack.com/MiaSolverio.”

She discusses this trend in detail, and also many other interesting trends in business and in

the economy, that post is called, "Is AI making us dumb?" The answer is yes.

Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Passen and engineered by Benjamin Spencer. Our video editor is Brad Williams, our research team is Dan Salon, Isabella Kinsel, Chris Nodon, Hugh, and Mia Sylvario, and our social producer is Jake McPherson. Thank you for listening to Proftry Markets from Proftry Media. If you liked what you heard, give us a follow. I'm Alison, and tune in tomorrow

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