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. So I would say all of this to me means that the rivalry has entered a new phase.
Welcome to China Decode. I'm Alice Han.
And I'm James Kynge. In today's episode of China Decode, 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, let's do a quick check-in with how the Chinese markets are starting the week.
On Monday, the markets opened the week 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 by over 15% in Q1. That growth comes in spite of the shocks brought on by the war in Iran and is largely attributed to the booming AI and chip industries in mainland China. The high-tech manufacturing sector alone saw a 47.4% gain in profits in Q1. Stock market standouts included More Threads up 8.5% and SMIC A-shares up 5%. Foxconn Wireless and Leard Optoelectronic Company were both down over 12%. And tech giant stocks were broadly mixed, with Tencent ending the day down 3% and Baidu up 3.5%.
All right, let's get into it. As the US and China barrel towards a high-stakes summit next month, the fight over intelligence is getting a lot more aggressive and a lot more complicated. Just today, China has announced it will prohibit foreign investment in Manus, a Singapore-based AI company with Chinese founders, which means Meta's December acquisition of the company will have to be undone. Experts are saying the move could hold other Chinese entrepreneurs, especially in the AI space, from seeking out foreign partners. Meanwhile, the White House has now accused China-backed actors of running industrial-scale campaigns to essentially siphon off the capabilities of American AI labs, querying systems millions of times to replicate how they work. It's the kind of claim that is hard to definitively prove, but if true, it suggests the global AI race isn't just about innovation, it's about extraction. And here's where the timing gets really interesting. Just as those accusations ramp up, Chinese startup DeepSeek has rolled out a powerful new model built cheaper, released to open source, and quickly closing the gap with US AI leaders. What some are calling China's DeepSeek moment is starting to look less like a one-off and more like a real strategy. James, we talk a lot about AI on this podcast, and with good reason, I think. I think some of the news that has come out seems to suggest that there is an escalation now in this AI conflict between the US and China. And it's not just driven by Washington and Beijing. I detected in China, I was just there for three weeks, consternation about AI competition, but also about the politics of Silicon Valley. I want to get your take really quickly on whether or not AI is going to be perceived broadly as a threat, not just by American legislators, but also by Silicon Valley.
Well, welcome back, Alice. Welcome back from China. I'm dying to hear more about your trip there. But as far as I see it, this really is pretty big. We've got what I would say is kind of like a Cold War curtain coming down over the US-China competition over AI. Until now, there's been a lot of rivalry, mostly commercial rivalry. We had OpenAI's ChatGPT in late 2022 and then we had the first DeepSeek moment in early 2025, and both the US and China were going really strongly, fueled by a lot of money and a lot of enterprise. But 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. So I would say all of this to me means that the rivalry has entered a new phase. The White House is talking about exploring measures to hold foreign actors accountable. That's the phrase they use for industrial-scale distillation campaigns. To me, I think the important thing is that politically, geopolitically, this is a step change. It is like the US law enforcement agencies are limbering up to really get moving on the AI frontiers with China. So what is distilling? It's basically the scenario in which a Chinese AI company would send hundreds of thousands or millions of prompts, probably from proxy accounts through VPNs to camouflage their source, to a US LLM. That's a large language model. And then it collects all the replies that it gets, and it collects all those replies, and that allows it to develop a sense of the decision-making patterns of the US large language model, its reasoning, its confidence levels. It effectively allows it to kind of map what the algorithm behind the target LLM is. To me, this is what this distillation is like. Now, just to give China their say, they say that the US claims are entirely baseless. They say they're a slanderous smear against the achievements of China's artificial intelligence industry. But, you know, whatever the truth is, it feels like both sides are getting more acrimonious, that the temperature on the AI competition between China and the US is getting stronger. But what's your sense, Alice? How do you see it?
Well, I think, you know, putting aside Trump's trip to China, it is increasingly likely to happen next month. I sense pressure from OpenAI and Anthropic to get Washington to really crack down on China distilling US models. Those two companies have long been harping on about the threat to not just national security but also to US AI lead through China's willingness to distill models. But I sense that at least from Washington's perspective, even although many analysts and technical experts are pushing them to do more export restrictions or regulations to obviate distilling of models. Right now it seems like Trump is in the mode of summiting and really trying to extract some kind of a deal or series of deals. I was in China the last three weeks. It was obvious that the Chinese side are optimistic about the meeting even if nothing substantive comes out of it. They believe that the mood music will be positive in a few weeks' time and they also believe that Xi will be going to the US in the second half of the year and that that Trump meeting with Xi in China will tee up Xi's own visit to the US in H2 and that they similarly will probably meet at APEC and G20 later in the year. So in total we could see four meetings throughout the course of the year. Although this is definitely, I think, you know, a thorn in the side of the relationship. My base case right now is that both sides, in particular Washington, want to be seen to be making a deal and to have a positive relationship right now. So this I think will continue to be in the background but I don't think it will be at front and center. I similarly heard that there was consternation in Washington about China's biotech and pharma supremacy increasingly and that some members of Washington were trying to push for legislation or executive action on the biotech-pharma front. But right now I think none of that matters because all that matters is what Trump wants and Trump clearly wants to have a big win coming out of Beijing in a few weeks' time.
That's really interesting. I must say I get the sense there's a disconnect between the diplomacy between the US and China, particularly ahead of Trump's planned visit next month, and the reality of the deep state in both countries becoming more and more wary and putting on more and more controls and talking about, you know, more and more sanctions in addition to what we've just been talking about. The DOJ in the US is actively prosecuting individuals who are smuggling advanced Nvidia servers into China. The Commerce Department is investigating companies like DeepSeek for their use of restricted American AI chips. And there's a couple of big pieces of legislation being proposed such as the Decoupling America's Artificial Intelligence Capability from China Act. That's not law yet, but it's proposed. And it threatens up to 20 years in prison and millions in fines if you engage with specific Chinese AI technology. So there does seem to be a lot going on in the background. The US seems to be really getting tough, maybe in the shadows. Maybe Trump will be out there in front making nice with the Chinese and the mood music around the summit will be fairly friendly. But I think the true trajectory of the relationship continues to be bad.
One thing that I will end on that was raised in a conference I attended in Beijing just the other day, we haven't discussed, is the use of AI in military applications. I think there's a real concern from Beijing's side about autonomous weapons that have been used more recently in Iran. So that could resurface as a discussion. Certainly it was part of a strategic dialogue that had just been rehashed towards the end of the Biden administration and potentially, you know, in the bull-case scenario about the relationship. If this summit goes well, that could pave the way for more strategic dialogue about autonomous weapons controls. But I'm not holding my breath. That was just raised as an issue by the Chinese side that could come to the forefront again. Okay, we'll be back with more after a quick break. Stay with us.
Support for the show comes from Grammarly. You already know the world moves fast. Between constant messages, deadlines, and decisions, even the most organized people can feel pulled in a thousand different directions. But work today still depends on clear communication. And when every message counts, sounding hurried or generic can mean getting missed. Grammarly gives you one place to think, write, and finish your work. And you can find it right where you already write with access to agents that help you sound natural, clear, and engaging. Whether you're writing an email, proposal, or novel, Grammarly helps you go from draft to final draft to done in no time. You can use Grammarly's AI chat to come up with ideas, outline a solid draft, then refine it with context-aware suggestions that fit what you're working on. You can see why 90% of professionals say Grammarly has saved them time writing and editing their work. That's because Grammarly is designed to simplify complex ideas with clarity that sounds like you, not AI. In a world of generic AI, you don't have to sound like everyone else. With Grammarly, you never will. Download Grammarly for free at grammarly.com. That's grammarly.com.
Support for the show comes from Northwest Registered Agent. Your business identity is everything that makes your business legitimate and professional. From public records and compliance to your website, email, and phone number. With Northwest Registered Agent, you don't just form a business, you start a complete foundation built for privacy, credibility, and growth. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US, boasting over 1,500 corporate guides, all of whom are real people who know your local laws and can help you and your business every step of the way. When you form your business with Northwest, you get a complete business identity, not a stack of vendors to deal with. That includes registered agent service, a business address, operating agreement, domain, website, professional email, phone number, and built-in privacy. In other words, your home address, personal email, and phone number stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/profree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/profree.
Welcome back. While Washington is warning 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 Chinese currency, the renminbi, through a booming offshore market known as dim sum bonds. The reason is simple. It is cheaper. With lower interest rates and massive demand from Chinese investors, borrowing in RMB has become one of the most attractive funding plays in current global finance. Zooming out, and this is bigger than just bond markets. It is part of a broader push by China to internationalize its currency and chip away at the dominance of the US dollar. And increasingly, global institutions from governments to banks are playing along. So at the same moment the US is accusing China of exploiting American innovation, the financial system is drifting quietly but materially towards China's orbit. And this is an interesting topic for me because, you know, I deal a lot with markets, with clients. You know, anytime you meet with the PBOC, they're really trying to sell you on both the Panda bonds, the onshore renminbi-denominated bonds, and the dim sum bonds, the offshore ones that are sold through Hong Kong. And, you know, purely looking at it, as I mentioned, economically it makes sense in a time where Chinese interest rates remain considerably low at around, you know, 10-year government yields around 1.75%.
If the rest of the world, including the US, has inflation risks to the upside and rates are probably going north, that I think continues to make Chinese bonds look attractive in terms of lower borrowing costs for foreign investors. My sense of this is that this is certainly a signal of something. When you've got Goldman Sachs, the symbol of American capitalism, issuing Chinese debt in renminbi in the middle of a US-led war against Iran, it has to be a signal of something. But what exactly? I've been puzzling over. My sense is that it is not yet a sign of the decline of the US dollar or anything as drastic as that. The US dollar is in pretty good shape. US financial markets are just unbelievably strong. But it probably is a sign of something more simple. And as you said, issuing debt in Chinese, in these dim sum bonds, is much cheaper than issuing them in the US. I think Goldman Sachs had to pay about a 3% coupon on its 10-year dim sum bond. If it had issued the same bond in America, it would have to pay about 5 to 5.7%. So there is a bit of a differential there. I also think that this is a move by Goldman Sachs to show cooperation, to show commitment to the Chinese government. China does like foreign companies issuing these dim sum bonds. It likes the way this offshore renminbi bond market is getting deeper and bigger. It thinks that this shows China's rising status in the world. So I think there's a bit of a nod to Beijing as well. I don't know whether the US would be worried about that. I'm really not that sure about that. But do you think that's a possibility? Do you think the US will be looking at Goldman thinking, why are you issuing bonds over there in China?
Well, that there is a... I wouldn't say no to that being a risk given the Trump administration and its scattered attention to detail. But I would say in general that it isn't a risk to the US dollar despite the fact that we're seeing the doubling of issuance of dim sum bonds just year-to-date compared to the same period in 2025. Yes, that suggests that more investors are getting interested for structural reasons. But this doesn't displace dollar dominance, which largely is derived from, you know, total share of global FX reserves, total share of trade invoicing, and total share of loans. And across all metrics, the US dollar is by far, you know, at huge magnitudes much larger than CNY, and that will take a while for CNY to even get close to closing the gap. But it does suggest one, I think, key principle, which really started over a year ago when we started to see the unwinding of the yen trade. So the Japanese yen, on the back of greater inflation expectations and rising rates. So traditionally the yen, as you know, has been a very popular carry trade in the sense that investors will borrow yen at low interest rates and it's generally a cheaper currency, and then use that to invest in high-yielding assets and then pocket the change. So with the unwinding of that, I think the CNY has replaced some of that structural dynamic. But I think this is all really just marginal compared to the real table stakes, which are, you know, how will CNY increase in the use of global trade and in FX reserves. Now I do think that since Trump 2.0, that CNY has been creeping up in global FX reserves. It has also been creeping up in some level of trade invoicing, notably with the Russians, and now it seems increasingly in the Middle East. But this is still a long, long game, and China is quite a bit behind. I will mention, you know, since the Iran issue hasn't resolved itself, that at least two ships recently have been paid in renminbi, and this is payment to Iran to secure safe passage through the Strait of Hormuz. So again, an indication of the direction of change potentially in bilateral payments between Iran and China.
Right. Absolutely. So the renminbi is becoming more of an international currency, but still very far from a threat to the dollar's dominance in the global economy. Is that fair?
