Is China about to win the AI race?

Hello and welcome to Eye on AI…In this edition: Is China about to win the AI race?…AI reasoning risks...Anthropic is on track to turn a profit years ahead of OpenAI…and OpenAI’s flip-flop on a government “backstop.”

Hello, Beatrice Nolan here, filling in for Jeremy Kahn. The AI industry has been mulling a key question recently: Is China pulling ahead in the AI race?

It’s a debate sparked by Nvidia CEO Jensen Huang, who made headlines last week after stating that “China is going to win the AI race.” Huang cited Western cynicism, export restrictions, and China’s advantageous energy situation, noting that companies find it far easier to secure energy supplies there. Huang later walked back the comments in a statement shared to Nvidia’s X account, clarifying that China was, in fact, “nanoseconds behind America in the AI race.”

Huang, of course, may have his own vested interest in saying all this, but he isn’t the only one to claim China may be catching up with the U.S.’s AI efforts. In fact, there are a few reasons to believe Huang’s original claim may be a valid one.

The energy issue

For one, if the AI race fundamentally comes down to an infrastructure competition, one driven by the ability of nations to construct and power massive, energy-intensive data centers rather than by who can achieve incremental algorithmic improvements, China currently holds a significant advantage.

The country has demonstrated a capacity to execute large-scale projects with speed and coordination, thanks in part to the government’s very active role in the economy. And, as Huang highlighted in his comments last week, subsidized electricity and streamlined regulatory processes make it substantially easier for companies to operate power-hungry AI facilities in China. By contrast, U.S. firms face a fragmented regulatory landscape and comparatively higher energy costs, which could hinder the rapid scaling of AI infrastructure.

Experts have long warned that electricity supply is likely to be the next critical bottleneck for the AI industry, and that Beijing appears to be ahead in addressing a few of these critical energy challenges. In contrast, power grids in many U.S. cities are so strained that some companies are choosing to build their own power plants instead of depending on the existing electrical infrastructure.

U.S. tech firms are still exploring alternative power solutions, but these projects may take years to come to fruition, if they ever do. Energy constraints are even hitting some of tech’s biggest players; for example, Microsoft recently disclosed that it has GPUs “sitting in inventory” because it can’t find enough power to use them.

The open-source lead

There’s also the open-source issue. According to a recent report from a16z, China has also now officially overtaken the U.S. when it comes to open-source AI downloads. A16z called the shift a “skull graph moment,” which is the point at which a challenger not only closes what once seemed like an unbeatable gap with an incumbent but also starts to pull ahead.

Anjney Midha, general partner at a16z, also recently issued a warning around China’s dominance in open-source models, particularly with startups like DeepSeek and its R1 model; he encouraged U.S. companies to invest in frontier teams and work to close the open-source gap.

China-based companies like DeepSeek have also shown they are masters at optimizing processes. For example, with DeepSeek’s R1, the company proved that while it may not invent the first version of something, it is capable of producing it faster and cheaper, without sacrificing performance.

Recent research from both Tencent and DeepSeek has also demonstrated how China is increasingly emerging as a source of AI innovation. For example, Tencent’s CALM model showed that replacing token-by-token generation with continuous vector prediction dramatically improved efficiency, while DeepSeek’s new open-source model compresses text into visual representations, allowing AI systems to process far more information at lower cost. There is some argument that these methods may have already been quietly used by Western labs like OpenAI or Anthropic, but have just not been publicized in the same way.

Does China already have the AI race in the bag? Probably not just yet. But its AI companies are certainly well placed to make a strong play.

With that, here’s more AI news.

Beatrice Nolan
bea.nolan@fortune.com

This story was originally featured on Fortune.com