I've never lived in a country that is as football mad as China. And I come from the UK, but China is more football mad, I would like to say, than the UK. People are fascinated by it. So, for China not to have qualified for the World Cup since 2002, obviously, it's a big disappointment for Chinese people.
Welcome to China Decode. I'm Alice Han.
In today's episode of China Decode, we're discussing private companies limiting the use of AI models in Hong Kong, a Lululemon campaign that goes wrong, and World Cup fever takes over despite the Chinese team not qualifying this year. That's all coming up. But first, let's do a quick check-in with how the markets are starting the week in China. On Monday, markets were once again open following the Dragon Boat Festival holiday and saw a strong rebound. The Shanghai Composite closed up 1.78% and the Shenzhen Component finished the day up 2.13%. Its highest level in 11 years. The People's Bank of China announced it would keep its key lending rates steady. Notable gains included Bank of China up 2.8%, 8% Narrow Technology, a semiconductor equipment company, up 3.3%, and electric battery maker CL up 4.4%.
All right, let's get into it. JP Morgan Chase has reportedly cut off its employees in Hong Kong from accessing Anthropic's AI models, citing concerns over licensing terms that restrict use in Greater China. Goldman Sachs has already made a similar move in the region. At the same time, Washington is escalating pressure on Dutch chip maker ASML over concerns that advanced chip lithography equipment could have reached China. A reminder that the battle over AI isn't just about software, but also the hardware needed to power it. So, James, I thought it was super interesting to have those two stories really come to the fore in pretty much the same week. And it reminds me that, you know, we are living in a technological cold war where there is an iron curtain increasingly developing, being drawn up between mainly China and the US. You know, we can debate as to whether or not, you know, Anthropic has done this move to, you know, cut off access to China and now Hong Kong because it wants to be seen as anti-China and pro-US, or if it's kowtowing to pressure from Washington.
But what is clear to me is that increasingly Hong Kong is getting looped into mainland China. This, I think, may be net bad for the financial services sector in Hong Kong, which relies on being a cross-border hub, not just of funds and financing, as you know, but also of talent and IP. And then more than that, the ASML story just reminds me the stakes are not just about the models themselves. They're also about the hardware used to power them. Now, ASML is saying that they weren't involved. But the fact that the Americans are going hard after them suggests that in this kind of tech race, not just over models, but increasingly over chips, I feel as though the US is getting more and more worried, both in the private sector and public sector, in terms of maybe China catching up or China really having real cards to play that we've discussed previously. But James, do you agree with that?
Yes, absolutely. I mean, of the two strands that you mentioned, Alice, I would say the ASML allegation by the US government is probably the more significant. We don't know if it's true at the moment. But the fact that the US Department of Commerce is escalating its confrontation today, that's Monday, in Europe, with ASML on this topic, seems to me to show that the US is at the very least very angry about this. These are both parts of the bigger tech war, tech rivalry between the US and China. But of the two, I would say the ability of the West to make the world's most advanced semiconductors, and China, which is currently unable to make those really advanced semiconductors, is the most important. It's the area where the gap between China and the US remains the biggest at the moment. And if it's true, and I stress if it's true, that the world's most advanced chips, which are manufactured by ASML, have actually been sent to China, then this is a massive game changer because these ASML machines, and I've actually seen them. I've been to the ASML factory in Eindhoven and I've seen the most advanced machine they make. They are simply unique. No other company, no other country in the world can make these so-called EUV machines. And without them, you simply can't make the world's most advanced semiconductors. So, if it's true, it's a massive issue.
ASML has denied it. They have rejected every element of the US allegation. So, it's a very, very emphatic denial. They say they've never shipped an EUV machine to China and they've added that they've never shipped any component, module or equipment specifically designed to be used in an EUV machine. So that's a really strong denial. There's no wiggle room there, as far as I can make out, for weasel words. But as I mentioned, the US Department of Commerce has escalated its confrontation today. They are presenting specific documentary evidence that the company shipped specialized transport equipment and other components compatible with extreme ultraviolet lithography to Chinese entities. Now, the fact that the US Department of Commerce is escalating says quite a lot to me. This basically shows that the tech war between the US and China remains very much in force. In spite of the mollifying summit that we saw between Trump and Xi Jinping in recent weeks, this tech war remains virulent.
Now these LLMs, and particularly Anthropic, the issue as you mentioned, Alice, is Hong Kong. The mainland already cannot get hold of Anthropic's LLMs, the large language models, these extraordinary AI programs. But now JP Morgan Chase is restricting Hong Kong from using the different LLMs that Anthropic makes. And so this means that not only is China putting restrictions on the US in what the US can use when it comes to LLMs, but also the US, we know for a long time, has been putting restrictions on China. But now Hong Kong is part of the whole picture as well. Restrictions on the use of these LLMs in Hong Kong is now very much part of the picture. And this goes against what Hong Kong was specifically arranged to be in the past. Hong Kong has always been a special case. It's designated as a special economic zone with China. It's got a high degree of autonomy, etc., etc., but now the US is treating Hong Kong pretty much as just another part of China.
I'm puzzled because to what extent is this decision by Anthropic, and OpenAI prior to Anthropic's announcement, to basically cordon off Hong Kong and treat it like mainland, a political decision or is it a competition concern? What I mean by that is, are they motivated to lump Hong Kong with mainland China because they see China as a big risk? Now, Anthropic has been very public in saying that it is pro-American AI and believes that it should be at the vanguard in the competition, national security and technology competition with China. Or is it really, you know, Anthropic and OpenAI very worried about distillation? Because if it's this latter scenario, then there are so many Chinese engineers, tech companies that exist outside of mainland China. You look to Singapore, are you going to extend to that? Are you going to extend to the, you know, many hundreds of thousands of Chinese engineers and top-level talent in Silicon Valley, say, are you going to extend that even to your employees? Now, Anthropic just came out, and we haven't mentioned it yet, but I think this is quite significant. It came out and said, well, the Chinese nationals who are working for the company can't be working on Fable and Mythos. They're barred from working on that. You know, to what extent is that actually happening remains to be seen, but it seems that they're taking that drastic action too, to cut off some of the talent having proximity to the cutting-edge frontier models, Fable and Mythos. So I'm not really sure how this plays out, but generally, let's take the other side on Hong Kong's perspective. I think this is not great. You know, I think somewhere in the line of a quarter of Hong Kong's GDP is in financial services and it employs 250,000 people. This is a significant part of the Hong Kong story, and if you basically ensure that the financial services and tech companies in Hong Kong don't have access to leading models, but also are not interoperable or plugged in with the rest of the companies outside of Hong Kong, that creates a lot of issues, I think, for the Hong Kong financial services community. So I come away from these announcements feeling that this isn't great for Hong Kong's pledge to be, you know, a fully international cross-border hub. And I worry a little bit about what this means for Hong Kong and its financial cross-border position, but also from an R&D standpoint, right? Because a lot of, I think, the optimism about Hong Kong from an R&D standpoint is, look, we're going to get access to both the Chinese and the American leading models and we're going to be able to incorporate the best of each system. Well, that future is no longer apparent for Hong Kong, and that, I think, quite remarkably changes how I think about Hong Kong moving forward.
And to your point about ASML, I was looking at some images and videos of the huge equipment that is required and hyper-complex, both to move and to maintain, and they require ASML to be part of that process. It strikes me as very difficult for ASML and the Dutch to reject the American curbs on semiconductor equipment restrictions per the MATCH Act. So again, I sort of am puzzled as to what Washington is trying to achieve. Are they politically motivated here or is there a real substance to these accusations? Because if it's politically motivated, are they trying to send a message to the Europeans, to other third-party countries to say, 'Hey, don't mess with our restrictions. This is a serious competition with China. We're watching you.'
On the ASML front, I really don't know. You know, there seems to be a very strong disagreement between ASML and the US Commerce Department. This is sort of black and white. You either are exporting highly sensitive EUV technology to China or you're not. Of course, ASML has a huge presence in the China market and the China market is very important to ASML. But ASML is very well aware that it is banned from exporting EUV technology to China. There really isn't much ambiguity about that. Personally, I would be surprised if ASML has done this. Is it possible then that there's some kind of smuggling gone on? Again, very difficult because this is really, really high-tech, sensitive technology. You need a whole team of top engineers from ASML to travel with these semiconductor tools. You can't sort of make it up after it's arrived in China. So I'm puzzled by this. I'm genuinely puzzled. I don't know what's happened, but I'm going to be watching it very carefully because, as I said, if China has got hold of one of these EUV tools, then I can't see any reason why it wouldn't be able to make the world's most advanced semiconductors. Obviously, after a period of time,
If you were to assess based on these two developments, is China better off in this AI competition or not? I think in the short term this isn't great for a place like Hong Kong. In the mainland, I think it's a bit of a wash. You know, it doesn't at all impede on the amount of development and capex that is going, although arguably a lot less compared to the US, 10 times less, but still quite significant amount of capex that is going into AI development full speed ahead. And there's ways to keep distilling even if you ban it from the mainland and Hong Kong. But on the hardware side, I worry that this might be the first innings of even more restrictions. We saw the Pentagon ban more Chinese companies based on their military associations with the PLA. I worry that we're in the first innings of further crackdown on China-related export restrictions as it pertains to semiconductors and chips. Now that David Sachs has left the White House, he was really, I think, one of the lone voices saying, 'Hey, the export restrictions don't work.' So I worry that we may be in for more sustained tech competition.
I think the first story about JP Morgan Chase not allowing its employees in Hong Kong to use the Anthropic models is just an example of how piecemeal, how kind of patchwork the US restrictions have been and how really largely futile they've also been. You can be a Chinese person in Singapore. You could be a Chinese person in the US or a Chinese company and you can easily get access to Anthropic. If you want to train your Chinese LLM by using Claude or one of the other Anthropic models, you've got no restriction on you from doing that. You don't have to do it in Hong Kong. So I can't really see what Washington is aiming at. There doesn't seem to be joined-up thinking on this. And I'd go one step further than that and say that when it comes to AI, the US has been ineffective, I think, in trying to hold China's progress back. I think we can say that maybe China is a few months behind the US on making these LLMs, but I would say for sure that the US has been unable to significantly hamper China's progress in making world-class LLMs so far.
Okay, we'll be back with more after a quick break. Stay with us.
Support for the show comes from LinkedIn. If you're a small business owner, you don't need me to tell you how much hiring great people matters. But the time and resources you have to spend to get it right are precious commodities. Sourcing, connecting with, and screening candidates can quickly eat into time better spent on your customers. That's where LinkedIn Hiring Pro comes in. It's designed to be your hiring partner, helping you source the right candidates faster. That way, you can hire with confidence without making it feel like a full-time job. LinkedIn Hiring Pro simplifies the entire process all the way from writing your job post to shortlisting candidates and running AI-powered initial interviews. Plus, it does it all through a conversational interface where you can just describe what you're looking for in plain language. LinkedIn says nearly 60% of hirers find someone to interview within a week. With Hiring Pro, you spend less time searching and more time connecting with the right talent. So, instead of sifting through piles of resumes, you get a tight, high-quality shortlist that actually moves things forward. Join the 2.7 million small businesses using LinkedIn to hire. Get started by posting your job for free at linkedin.com/pro. Terms and conditions apply.
Welcome back. Athleisure brand Lululemon recently held a promotional event for the brand at the Great Wall of China. It was billed as a celebration of Chinese culture, but the intent backfired badly when a Japanese-style drum appeared in promotional imagery, triggering a nationalist backlash on Chinese social media that topped 50 million views on Weibo. James, this is not the first instance of some, I would say, hackneyed and ill-fated PR done by a Western company in China. I looked at some of the pictures. They're very impressive. If anyone wants to see Lululemon mats on the Great Wall of China, people doing yoga, it's a very impressive image. But it seemed like somebody dropped the memo internally about including a Japanese drum at a point in time where I think Japan-China relations are as bad as we've ever seen, really, since 2010, 2011. You know, when you started to have the Senkaku Islands incident and the rare earth embargo, I think we're in a similar patch of really bad Japan-China relations. So, the timing couldn't be worse. James, what was your reaction when you saw the imagery?
