Equities
China’s DeepSeek shakes up the global AI race
7 min read 25 Jun 25
Please see our glossary for information on the financial terms used in this article.
Artificial Intelligence (AI) is becoming one of the most important technologies in the world. It could change how we live, work, and even how countries compete with each other. Until recently, the United States (US) was seen as the leader in AI. But a new AI model from China revealed that China is not far behind. What are the investment implications of US-China technological rivalry?
A Surprise from China
In January 2025, an obscure Chinese company called DeepSeek released a free AI tool called R1 that quickly became the most downloaded application on Apple’s US App Store. R1 is a large language model (LLM), which means it can understand and generate human-like text – just like ChatGPT.
DeepSeek’s arrival on the AI scene stunned investors. R1 appeared to perform as well as offerings from US tech giants like OpenAI, Google, and Meta. More surprising, it reportedly cost much less to build than its US counterparts. DeepSeek said it spent just $5.6 million and used 2,000 Nvidia chips, while US models often use over 10,000 chips and cost billions2.
This news caused a big reaction. US tech stocks fell sharply. Nvidia, the US company that makes most of the chips used in AI, lost about $600 billion in value in one day – the biggest single-day loss in US history1.
Why it matters
DeepSeek’s emergence disrupted the prevailing narrative about the future of AI. Investors started to worry that if AI can be built more cheaply, companies might not need to spend as much money on the equipment than runs it. This could affect the profits of big tech firms.
According to Jeffrey Lin, Head of Thematic Technology Equities at M&G Investments, “investors anticipated the efficiency gains would mean companies won’t need to commit as much investment as previously announced to integrate AI into their products or processes.”
The new model also challenged the assumption that US tech firms were ahead of their Chinese counterparts. The importance of being at the forefront of this nascent technology was demonstrated by the US response. US President Donald Trump announced a $500 billion investment in AI, called the Stargate Project3. The European Union (EU) also pledged €200 billion4, and France added another €109 billion to support AI development5.
Dominance of the AI landscape
Number of notable machine learning models by geographic area, 2023
Source: The AI Index 2024 Annual Report, Stanford University.
AI is now seen as a key part of the so-called “fourth industrial revolution” due to the transformative impact it could have on the way we live and work. Countries want to lead in AI because it could provide economic benefits through productivity gains, improve healthcare and education, and even strengthen national security.
Innovation in China
It is hard to say at this stage who will eventually become the dominant player in AI. One of the biggest surprises of the DeepSeek episode was how far China has come, despite US efforts to block its access to advanced chips.
However, this shouldn’t come as such as shock. “China has many talented computer scientists and the fact they have been able to develop this product with much less computational power demonstrates their capabilities,” explains Lin.
China’s economy has changed in recent years, with a new emphasis on innovation-led development. China now files more patents than any other country – 1.7 million in 2024, compared to 600,000 in the US. China is also producing more science and tech PhDs than the US6.
As a result of government policies, China today is a highly innovative economy that is at the forefront of many industries. It’s leading in areas like electric vehicles (EVs), solar panels, and battery technology. For example, Chinese carmaker BYD recently overtook Tesla as the world’s biggest EV producer7.
What does this mean for investors?
DeepSeek’s launch encouraged investors to take a fresh look at Chinese tech companies. Firms like online retailer Alibaba and online search firm Baidu saw their share prices rise. For the past few years, many investors avoided China due to concerns about its economy. But the country’s progress in AI has helped to rebuild confidence in its stockmarket.
“Despite the malaise in the Chinese stockmarket in recent years, we have remained excited about the technological advances we have seen coming from the country,” says David Perrett, Co-Head of Asia Pacific Equities at M&G Investments.
The age of artificial intelligence
Considering the implications for the evolution of AI, there is a chance that more efficient AI technology could drive wider adoption and deployment of AI. Lin is optimistic. “In the history of computing, whenever computers become more powerful and new applications for computing emerge, the addressable market increases,” he observes. There may be a shift in focus but Lin believes overall demand is likely to continue growing.
In his view, AI is a multi-decade opportunity that is still in its infancy. He sees three different types of companies benefiting from AI:
- Enablers – like Nvidia, which build the core technology;
- Providers – typically software firms that add AI to their products; and
- Beneficiaries – companies that use AI to grow or work more efficiently.
So far, most attention has been on the enablers. But if DeepSeek’s success leads to wider use of AI, the focus may shift to providers and beneficiaries in the near future.
The age of AI is arguably just beginning and the landscape is evolving fast. In Lin’s view, DeepSeek may be remembered as a key moment in AI’s journey. “Ultimately, we think it's a sign of acceleration of the development for AI. We can potentially get to new AI applications sooner rather than later,” he suggests.
The development of AI may prove to be more of a marathon than a sprint but for Lin there will be plenty of long-term investment opportunities as the pace of innovation and deployment accelerates in the years ahead.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.