Transcript: The Hidden Engine of China’s AI Boom @ China Decode

For instance, you could ask an AI agent to book your entire holiday. You just write, “Please book me a holiday in France,” with a few more instructions. It’ll book your air tickets, it’ll book your hotel, book your buses, book your taxis, book everything that you need. That is performing a task rather than simply replying to a query that you had. And of course, that uses many, many more tokens than simply asking a question.

So let me come to the crucial aspect of this — the cost differential between Chinese-generated tokens and US-generated tokens. Just to give you a little bit of an example, Minimax and Moonshot, these are two Chinese AI models, their cost per million output tokens is about $2 to $3. Conversely, Anthropic’s Claude Sonnet 4.5, that’s a big American LLM, they cost about $15 per million output tokens. So there’s about a sixfold gap between the US and China.

And so there is really a gold rush now, a frenzy in the US and in other countries around the world to get hold of these cheap Chinese tokens. That’s the reason why this is becoming a geopolitical issue, because a lot of startups in Silicon Valley are preferring to use Chinese tokens — in other words, Chinese agentic AI or LLMs — to power their startups, to power their technology. And that’s making a lot of people in the US quite concerned, both from a technological perspective and from a geopolitical perspective. But what are you seeing in this, Alice? Do you think we’re at a kind of turning point? Is this a big moment?

The Gold Rush and the Question of Sustainability

ALICE HAN: Well, it’s interesting. I think over a year ago you had the Airbnb founder and CEO Brian Chesky saying that Airbnb is actively using Chinese LLMs — models from Deepseek and Alibaba Qwen — because they were cheaper and it was easy to then fine-tune them for the engineers. But I don’t know how sustainable that is, and that was my next question to you.

My own sense is that right now we’re in a bit of a gold rush, but at some point, just as we saw in terms of the Biden administration putting tariffs on Chinese EVs and effectively blocking them, I wouldn’t be surprised if in a year or two we see similar movement politically coming out of Washington and Silicon Valley to start clamping down on Chinese AI companies being used — not just the LLMs but also the agentic layers — on the basis of national security threat. And I think that that isn’t off the table in terms of the realm of possibilities. In fact, I assign a pretty high probability to that.

I would also say that even although China may in a couple of years, or maybe less, be effectively blocked out of the US market, the EV example, which we talked about previously, shows that there are so many other markets for China. The fact that last March we saw over 140% year-on-year growth in EVs, obviously spurred by the oil crisis, suggests that even though Chinese EVs don’t have that lucrative big US market, there is plenty of other markets to play in.

And I think that, to your point, James, given that these agentic AI models are really quite a bit cheaper — in fact, to some extent, almost about 10 times cheaper than what is coming out of the US — this makes it very cost-effective for a lot of consumers and some corporates overseas, outside of China.

But all of this suggests to me that NVIDIA is the big winner, right? Because NVIDIA’s Jensen Huang has really come out and said agentic AI systems are going to be great because, to your point, James, they’re more token-consuming intensive, and that will be net beneficial for NVIDIA’s AI chips. How do you think about the winners and losers in this space? I certainly think there are a lot of Chinese winners. But I think at the end of the day, Nvidia is laughing its way to the bank.

Winners, Losers, and Geopolitical Concerns

JAMES KYNGE: Yeah, I mean, I definitely agree with you on the Nvidia front. Obviously Nvidia has the most powerful chips, the Blackwell series of chips. They’re much more powerful than any kind of AI chip that China can produce. And so everybody is going to be trying to get their hands on these Nvidia Blackwell chips as the premium on tokens increases, because obviously the more powerful your computer system, the more tokens you can generate more efficiently. So that’s a key aspect of this, definitely.

But I also tend to agree with your point on how the US will view this. Already we’re seeing US commentators saying that China’s superiority in tokens — the fact that it can produce tokens much more cheaply and export these tokens to the US and other countries around the world — is creating substantial financial, data, strategic, and regulatory concerns for the United States. And I can certainly see that from a US point of view.

If you’ve got a Chinese LLM or a Chinese agentic AI model operating in the United States, there is very little way that the US can regulate those because head office for those companies is back in China. The algorithm is back in China. The staff are back in China. It really is the genuine export of this Chinese technology. And the more that Chinese tokens and Chinese chatbots and agentic AI is used in places like Silicon Valley, the more embedded it becomes in one of the most critical and strategic sectors in the entire US economy — AI and more generally tech. So that has to be a big concern.

But my question is, how do you actually stop it, given that this is basically a click away? I can find a Chinese agentic AI model or a Chinese LLM simply with a search on my computer. So I don’t know how the US could stop it if they decide that they wanted to do that.

Can Washington and Silicon Valley Clamp Down?

ALICE HAN: Well, I think it would have to — I mean, definitely government agencies would have to crack down in the way that they have in the past couple of years on using certain Chinese apps. But also Chinese hardware — Chinese phones are effectively banned by American government agencies. That I think will be a low-hanging fruit to impose in terms of restrictions.

The next question is, will Silicon Valley get politicized about this issue and basically mandate from top down that the engineers can’t use Chinese agentic AI or LLMs on the basis of data security? That will be contingent on company decisions by the leadership in Silicon Valley companies. But given the recent tidal shift, I wouldn’t be surprised if that does happen. If at some point you have Mark Zuckerberg coming out and saying, “These are our big strategic competitors, not just in terms of corporate competition, but it’s a national security issue, and we need to crack down on using Chinese models.” I don’t think they’re at that stage yet because they’re still interested in seeing where it goes. Meta just bought Manus, as we talked about previously, although that seems to be in a bit of the crosshairs with China investigating the legality of that purchase.

And then one last thing I will say is that I get a sense that American and Western investors are frothing at the mouth with regards to Chinese AI companies from a public and private markets perspective. A lot of foreign people made money from the Minimax IPO. And now Deepseek just announced that it’s taking external fundraising at a $10 billion valuation — effectively fundraising at $300 million, looking at external investors, maybe open to foreign investors. I think that’s the next thing to watch. But certainly the stories that are coming out of China, I think, are getting a lot of Western investors enthused about the China AI landscape from a private and public markets perspective.

Why Chinese Tokens Are Cheaper: The Technical Edge

JAMES KYNGE: Yep, completely. I think that’s the gold rush aspect of this. But one thing I didn’t quite explain clearly enough is why it is that Chinese tokens are cheaper than those tokens generated in America. There are two main reasons.

One is that the cost of electricity in China is so much lower than it is in the US. And the other is a more technical reason. The way in which Chinese LLM models work is different in the sense that the Chinese AI architecture uses what’s called a “mixture of experts” system, which uses much less compute power to generate these tokens than the similar system in the US. So that’s a little bit technical, but I think that’s a crucial piece of background as to why China has a structural advantage in producing tokens cheaply.

China’s Export Control Strategy: From Defense to Offense

ALICE HAN: Yeah, really interesting point, James. And in a way, it’s because of the chip restrictions from Washington that they had to be more compute efficient. Indeed. To your point.

Okay, we’ll be back with more after a quick break. Stay with us.

Welcome back. We’ve been talking about imports and exports and the world of artificial intelligence, but let’s zoom out now to the bigger picture around exports in China. The Financial Times just reported that China has nearly tripled its use of export controls over the last 5 years.

James, in the last, I would say, 5 years or more, it has been a kind of tit-for-tat response between Washington and Beijing on export controls, almost to the point where I feel like China is copying and pasting what the US is doing as they reciprocate some of these export controls.

We started in the realm during the Trump 1.0 to Biden administrations with chip export controls, and we’ve expanded it to other dual-use technologies. And more recently, China has retaliated with rare earths. And now it seems that instead of being on the defensive or reciprocal front, it is going out on the offensive and trying to consolidate an export control regime that encompasses not just a whole panoply of rare earths and rare earth-related equipment technologies, but also solar panel parts and solar panel green technologies.

Now the question then is, what is next, right, James? And why is China doing this? I have my own thoughts, but I’m curious what you think.

The Scale of China’s Export Controls

JAMES KYNGE: Yeah, my sense of this is that we often focus on the measures that the US has taken against China in the trade war and tech war. And there has been a lot over the last 5 years. More than 3,000 Chinese entities, mostly companies, have been subjected to licensing requirements or other forms of US export control.

But as you mentioned, China has been much quieter about its own sanctions against the US. And as you’ve mentioned, it’s actually tripled its use of export controls over the past 5 years. There have been, according to an EU Chamber of Commerce in China study, 30 times between 2021 and 2025 that China has put export controls on, and that’s up from about 11 times in the previous 5 years.

And when we look at what’s happening in each of these 30 times, the picture becomes a little bit clearer. And particularly what becomes clear is China’s use of global choke points in supply chains to exert pressure on trade partners that it wants to punish. So there are 10 instances of China using global choke points in supply chains, such as the time last October when China put a whole slew of restrictions on exports of rare earths. Rare earths are these crucial materials used in making many, many different technologies, often high-tech, around the world.

So China’s shown that it will weaponize its supply chain on 10 of these occasions, and in 10 other occasions these have been different measures to coerce its trade partners to do what it wants.

Vague New Legislation Raises Alarm

But I think why this is becoming really perturbing right now is because last week there was a new set of controls. These are called the State Council Regulation on Industrial and Supply Chain Security. A bit of a mouthful there, but basically what these say is a whole load of legal rules and stipulations that are so vague that nobody around the world can actually ascertain what they really mean in concrete terms.

One of these rules makes it illegal to, “harm the security of the country’s industrial and supply chains.” The country’s in this case is China’s. So, I mean, what could that be? We have no clue what that means in real terms.

Another of the articles in the latest legislation says that China would carry out action against anyone who “carries out information gathering activities related to industrial and supply chains in China.” So let’s say a foreign company working in China was subject to some kind of a trade war sanction or a tariff or something like that, and it wanted to investigate its Chinese supply chain — something companies do all the time all over the world — then it could potentially be breaking the law in China.

So there are several other articles here in this extremely vague piece of legislation the Chinese just put out. And a lot of foreign companies, some of the biggest companies in the world, are very concerned about this. So I don’t know where this is going to go, Alice, but this seems a bit of a step change to me. Maybe this will just quieten down. I know you do a lot of consulting with foreign companies in China. Maybe this will just quieten down and go away. But what do you see?

China Rebuilding the Architecture of Export Controls

ALICE HAN: Well, I was at a talk in Shanghai late last year, and one person in the audience was actually an expert in export controls legislation in China, and she basically said quite emphatically and openly that from really Biden onwards, MOFCOM, which is China’s Ministry of Commerce, was basically recreating what the US’s Bureau of Industry and Security, BIS, has been doing — and building the architecture of the unreliable entities listing, which was a US creation that the Chinese then copied.

The affiliates listing more recently that Trump included late last year, which is to say that any subsidiary of an unreliable listed entity that had 50% or more ownership by anyone on the unreliable entities listing would be subject to the sanctions within the unreliable entities listing rules. China then did something similar.

And then more recently with last year’s fairly heavy to medium rare earth export controls, you saw China recreate the Foreign Direct Product Rule, or the de minimis requirements that the Biden administration had done, but China expanded it further by saying actually anything that is at least 0.1% sourced from Chinese rare earths, heavy rare earths, is subject to Chinese export licensure regime.

And that suggests to me two things. Number one, China has really been trying to use this as a defensive measure to stop America from expanding its export control regime. And number two, that China is very concerned about what they call stranglehold industries, or what we would call chokepoint industries, and the way that they can be used to coercively, through economic means, attack China’s supply chains.

From Defensive to Offensive

I sense now that there’s a bit of a shift from the defensive to the offensive, which is to say that instead of reciprocating what the Americans have done, they’re actually going through their supply chains and going, hey, where are areas where not only we are at risk of being choke-pointed by other countries, but where potentially we won’t be able to control our dominance in certain domains in the future.

And so then the big question to my mind, which I don’t have an answer for, is what other industries will China go for? Certainly in green technology, China is a leading player. We’ve already seen some announcements of semiconductor export controls, mainly on the basis of dual-use technology. But I think the next thing will be, what other areas — if it’s petrochemicals, if it’s commodities, and that is a huge part of the global supply chain — will China be putting in these export licensure regimes or export controls?

That I think is the next big question. But certainly I get a sense that they’re changing their whole attitude towards the export control regime, which is: we’re no longer just doing what the Americans have done in a tit-for-tat iterated game theory, but we’re actually going to work out a supply chain strategy to make sure that China has maintained dominance across several key chokepoint industries.

China’s Supply Chain Dominance as Leverage

JAMES KYNGE: Yeah, absolutely. I think that’s a very astute comment, Alice, because when it comes to the balance of power, China has the power in terms of its supply chain. Its supply chain is of unrivaled superiority in the world. Just a few numbers: in terms of generic drugs, China makes more than about 60% of the world’s total. In terms of legacy semiconductors — semiconductors above, I think, about 14 nanometers — China’s making around 70%. Rare earths, we’ve already mentioned, China makes about 80 to 90% of the world’s rare earths. In sector after sector, China has potential chokeholds over the rest of the world economy.

And I think it’s just showing the US that, hey, don’t tangle with us, we can beat you. If you’re going to put a whole load of restrictions on us, then we can hit you back by restricting our supply chain exports to the US and other countries.

And I just wonder how this plays into the summit between Trump and Xi Jinping, which is supposed to take place in early May. I don’t think we’ve got final confirmation of that yet, but maybe there’s an element of this — particularly with the rules that I just cited, the ones that have just come out last week — that China is just trying to build leverage in trade negotiations between it and the United States ahead of the Trump visit so that there aren’t any nasty surprises from Washington. I don’t know. That’s purely speculation on my behalf, but I’ve seen this movie a few times before, and China does tend to do things like that.

Solar Technology and the Oil Shock

ALICE HAN: Yeah, I could see that in the short term. But if China does go ahead and implement these export curbs on solar technologies or other green technologies, this couldn’t come at a worse time — not just for the US but for other developed and developing economies — because we’re in the midst of month 2 of a probably prolonged oil shock crisis emanating from the Strait of Hormuz. And China is making almost 80% of the world’s solar panel components. So if it really wanted to hit America right now, I think it would hurt a lot more. That punch would land a lot harder now than it would say a couple months ago.

So it is all very interconnected, but I do buy your take that China is showing its cards ahead of a summit and saying, don’t poke the panda.

Let’s take one last quick break. Stay with us.

Humanoid Robots and China’s Consumer Innovation

Welcome back. Moving now to the domestic market in China and how innovation is really starting to push the boundaries of consumer products. James, you were just in China and you flagged this as a trend that you’ve been watching closely. From in-car toilets to floating bicycles, ideas that feel unconventional, but maybe point to something bigger.

And now there’s a new headline that takes us even further. A humanoid robot just ran a half marathon in Beijing and beat every human and other robots in the race. James, you’ve been following this very, very closely. And I know you just got back from China as well, where you probably saw some wacky technology being used. What were some of the crazy, out-of-this-world technology uses that you saw when you were on the ground?

China’s Innovation Golden Age: Robots, Drones, and the Future

JAMES KYNGE: Yeah, I must say I am a bit of a sucker for humanoid robots. I did go around a couple of exhibition halls looking at the latest humanoids, but this humanoid robot that ran the half marathon in Beijing is kind of next level actually, because not only did the robot beat all the human competitors in the race, it was a hybrid race, so there were robots and humans, very fast, you know, humans, I mean, proper athletes.

Not only did it win the race by a very wide margin, but it also broke the world record for the men’s half marathon by an equally wide margin. It ran the half marathon in 50 minutes and 26 seconds, living up to its name. The robot is called Lightning. And so that breaks the human world record for the half marathon, which is held by Uganda’s Jacob Kiplimo. And that record is 57 minutes, 20 seconds. So basically, the humanoid was 7 minutes faster than the world record holder.

The other thing is that these humanoids, most of them ran autonomously, so they weren’t being controlled by somebody with a gadget. And that just shows again how far the humanoids have come. They can now assess their environment as they’re running along. They can follow a path. They don’t need to be controlled by somebody with a remote. So this was a pretty amazing thing. And I must say, I think YouTube and other internet channels have been lit up with this humanoid robot winning the race.

But to me, this is just one example of China moving into the passing lane when it comes to innovations of all types. And at the risk of going a little bit lavatorial, I couldn’t help but notice the one that you mentioned, Alice, the in-vehicle toilet. This is actually not a product yet. It is at the moment just a patent. But a Chinese carmaker, Seres, has been granted the patent for what it calls an in-vehicle toilet. It slides under the passenger seat of the car, and presumably it slides out again if somebody needs a convenience break. And it’s made to satisfy — this is according to the literature put out by the company — it’s made to, “satisfy users’ toilet needs on long journeys, while camping, or while staying in the car.” And just in case you’re wondering, there are special fans and extractors made to deal with the byproducts of that.

There are also all kinds of other car-related innovations underway. There’s massage seats, karaoke systems, a fridge, and all of these, I think, are trying to differentiate one car brand against another. In fact, in China last month, I was riding along in a car that gave me a massage as we went along. I must say it was very comfortable. And I was also in a car that jumps on the road when it sees an obstacle. So it’s going along and, here in the UK we have lots of potholes. If it sees a pothole, it’ll just jump them. And this happened when I was in the car. You hardly felt it. It was pretty amazing. So yeah, China is absolutely charging ahead. I’ve got plenty of other examples of Chinese innovations, but you must be seeing similar things.

The Drone Economy and China’s R&D Advantage

ALICE HAN: Well, I haven’t been following this as closely as you do, because when I go to China, it’s a lot about what’s happening in the economy and less about some of these newfangled technological innovations, even though I would love to learn more about them. But I do recall a year ago seeing a lot of drones being used for food deliveries in, say, Shenzhen. And there’s a lot of talk about the so-called drone economy in China, and building up the domestic use of drones for logistics, but also for consumer purchases and whatnot. Has that been a theme at all in your travels, James?

JAMES KYNGE: Yeah, I mean, drones are off the charts in China. There are all types of different drones being made, many of them with a military purpose. And I think we can see that both in Ukraine and in Iran. But I’m just wondering whether China is entering a kind of innovative golden age, a bit like America was in the run-up to World War I. At that time, the US had already invented the aeroplane, the light bulb, the telephone, the record player, air conditioning, automatic transmission, the machine gun, ballpoint pen, all of these things. A lot of people in the UK would say, hang on a sec, we got the patent for that lot. But anyway, there was a UK-US nexus going on behind all of those innovations and many more.

And I just think that China is now at this moment. I think that where we are right now will be regarded as a golden age. Some of the innovations are fairly, well, I don’t want to prejudge, but they seem a little bit out there. But some of them are genuinely impressive. I mean, you mentioned drones a minute ago. China has got these flying taxis, flying cars that are now leading the world in terms of autonomous passenger flight. There’s a company in Shenzhen called Ehang, and China’s going to pilot the first genuine commercial transport using these passenger flying cars.

One other I’d like to mention, which I think is truly amazing, is something called the T-Flight Hyperloop, which is China’s attempt to use a train to go faster than a plane. This is effectively a train that travels using magnetic levitation, so its wheels don’t even touch the track, it just skims over the track. It can travel up to 387 miles per hour.

ALICE HAN: Well, I was at Hong Kong University of Science and Technology last year, and they were very proudly saying that we’re the number one research institute in China in terms of patent influence. So not necessarily the volume of patents, but in terms of how many patents get used by industry. And they were saying we’re betting on innovation in the Greater Bay Area, so spanning from Guangdong Province to Hong Kong to Macau, and that you see a lot of cross-border talent in research, both in Hong Kong and in the mainland, and that that is spurred by immediate industrial application in the big southern Chinese provinces that are manufacturing intensive. So your Guangdong, your Shenzhen, your Hangzhou.

So I think what makes China unique in the contemporary environment is that you have strong R&D, but you also have strong industrial application in the way that Germany and Japan once were, but I think have really lost their mojo in some respects, but China has maintained that dual track of research innovation on one side and then application on the other side.

But I think the big sort of technological breakthroughs, when I think about AI, when I think about quantum, when I think about biotech, it’s still to my mind — and maybe you disagree with me, James — but when I think about the cutting-edge technologies, it still seems like the US is leading, although China is closing the gap on some of the benchmark KPIs. But at least for now, it seems like when we talk about world-class cutting-edge innovative technologies like Google DeepMind’s AlphaFold, for instance, it’s still coming out of the US, out of Silicon Valley.

Patents, Market Valuations, and Predictions

JAMES KYNGE: Yeah, I mean, I don’t want to write off the US in any way at all. Obviously there are a lot of very impressive innovations coming out of the US. But one number comes to me, and that is the number of patents being applied for at the World Intellectual Property Office of the United Nations. Chinese individuals and companies have got 1.8 million of these patent applications, and US companies and individuals have just over 500,000. So I’m not saying that this conclusively proves anything because you can inflate patent claims, you can get patents for things that are not very useful. So I don’t want to say that that figure tells a story, but I think it might point to a direction of travel at least.

ALICE HAN: Yeah. And certainly it doesn’t preclude them from being very, very innovative in what they’re doing. I remember very briefly I was seeing a factory in China late last year, that was making cutting-edge wheels that I think were steel and aluminum blend alloy. As a result, they were exceptionally lightweight, but still very hardy and intensive and durable like your traditional wheels. And they’re pretty much the only factory I think in the world that does it. They supply directly to Tesla. So there’s a lot of industrial innovation that I think I sense, to your point, James, it’s happening. And it might take us in very exciting directions like the Japanese did for the toilets, right? There might be some interesting consumer-related inventions that’ll be coming out of China very, very soon.

All right, James, you know what time it is. It’s prediction time. As you peer into the future this week, what do you see?

JAMES KYNGE: So I’m going rather bold this week, Alice. My prediction is measured in the hundreds of billions of US dollars. What I would like to say is that I think the gap between the total stock market valuation of China’s top 5 technology companies and the top 5 tech companies in the US will close somewhat over the next year. In other words, the gap in the valuation will close.

So just to give you a few numbers on this, the combined market value of the top 5 US tech companies, which are Nvidia, Alphabet, Apple, Microsoft, and Amazon, was $17.8 trillion last Friday. And the market cap of the top 5 Chinese tech companies last Friday — those companies are Tencent, Alibaba, CATL, Xiaomi, and PDD Holdings — was $1.48 trillion. So in other words, at the moment, the market is saying that the top 5 Chinese tech companies are worth 1/12 of the value of the US’s top 5.

I reckon by this time next year — this is not a scientific projection, but I just feel that it shows the direction of travel — I reckon this time next year, it could be 1/10 or something like that. So in other words, the Chinese companies will be worth more relative to the US companies, although of course the US companies will still be worth far more on an absolute basis.

ALICE HAN: Yeah, I mean, that sort of chimes with what could be happening in the US economy where, if you see inflation, a prolonged series of rate hikes, you might see the market start to cool and then people get worried about the AI bubble in the Mag Seven. I think that chimes with the directional travel of things in the US. So I could foresee that. So I’ll be on the same side of that bet.

So my prediction is a little bit more niche, but I think it’s important and it picks up on a theme that we had a couple of episodes ago. And that is, the UAE has just said that it’s potentially facing a liquidity crunch because of the oil crisis coming out of Iran. And it’s asking, I think in some reports, the US administration to help with currency swap lines. A couple of years ago, I believe in November 2023, China’s PBOC agreed a $5 billion USD currency swap agreement with the UAE’s central bank. I could foresee when that agreement ends — I believe in the next 2 years or so, it’s a 5-year agreement — that that number will be increased and we’ll have a greater increase of CNY usage in the region, in FX reserves, in currency swap arrangements. And going towards this theme of not necessarily de-dollarization, but an increased presence of CNY in trade, in FX, in swap lines in the Middle East region.

All right, that’s all for this episode. Thank you for listening to China Decode. This is a production of Prof G Media. Make sure to follow us wherever you get your podcast so you don’t miss an episode. Talk to you again next week.

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