China’s AI Sector, Propelled by State Backing, Expands Market Foothold and Capital Inflows Despite Western Containment

China’s AI sector has achieved breakneck growth on the back of government support. Its influence is widening across the Global South, heightening unease in Western capitals. Even as international scrutiny and sanctions intensify, capital inflows from the United States and other Western economies into China’s advanced technology market remain resilient.

Brad Smith, Vice Chair and President of Microsoft (MS), has publicly expressed concern over government subsidies granted to Chinese artificial intelligence (AI) companies. As Chinese AI firms leverage state support to expand their reach worldwide, a growing sense of alarm is taking hold across Western nations. Nevertheless, despite escalating warnings and regulatory measures, Western capital—including from the United States—continues to flow steadily into China’s high-tech sector.

State Backing Behind China’s AI Surge

On the 18th (local time), in an interview with CNBC at the AI Impact Summit in New Delhi, Smith stated, “We must always think about—and perhaps be somewhat concerned about—China’s subsidies.” While noting that U.S. companies maintain advantages in access to the world’s most powerful semiconductors and in technological innovation, he emphasized the need to closely monitor Chinese firms’ strategy of developing low-cost AI models with state support and rapidly scaling them across global markets.

In practice, the Chinese government last year deployed a national AI fund totaling 60.06 billion yuan (approximately $8.8 billion) to invest in early-stage projects, while local governments have provided vouchers to offset computing power rental costs. Smith observed that China had similarly leveraged state support strategically during its rise in the telecommunications sector, adding that some U.S. firms disappeared and European players such as Ericsson and Nokia were pushed onto the defensive. He further noted that Huawei and Alibaba operate data centers worldwide, remarking that “it would not be difficult for China to subsidize these companies.”

Industry observers, however, argue that the advancement of low-cost Chinese AI cannot be attributed solely to government support. A formidable energy infrastructure and comparatively low electricity costs have also functioned as critical growth drivers. China’s total power generation reached 10,072 terawatt-hours (TWh) last year, roughly nine times the 1,239 TWh recorded in 1999. This expansion reflects decades of systematic infrastructure development under state direction.

Through 15 successive Five-Year Plans, the Chinese government has set generation targets every five years and expanded power plant capacity accordingly. During periods of crisis—including the 2008 global financial crisis and the 2020 COVID-19 pandemic—Beijing actively deployed power infrastructure construction as a countercyclical stimulus tool. In parallel, China has pursued a pragmatic “black cat, white cat” strategy, mobilizing renewable energy, nuclear, and thermal power as needed. By assigning baseload generation responsibilities to thermal plants where renewables proved insufficient, the country established a stable and scalable electricity supply system.

Rising Adoption of Chinese AI in Emerging Markets

Backed by state support, Chinese AI companies are beginning to reshape the global competitive landscape. Last month, Microsoft assessed that Chinese AI had already overtaken U.S. AI in markets outside the United States and Europe. In particular, Chinese AI firm DeepSeek has expanded its market share across emerging economies—collectively referred to as the Global South—by leveraging accessibility and low pricing. According to Microsoft’s report, as of the second half of last year, DeepSeek commanded an overwhelming 89% share of the Chinese domestic market and demonstrated strong performance in Russia (43%), Belarus (56%), and Iran (23%), all of which face U.S. economic sanctions.

Microsoft assessed that DeepSeek secured users in emerging markets by offering its chatbot free of charge. In contrast, U.S. AI firms such as OpenAI, Google, and Anthropic have pursued closed-model strategies to retain technological control while generating revenue through individual subscriptions and enterprise clients. In lower-income emerging markets, demand for paid subscription models remains limited, enabling DeepSeek—focused on open-source AI models—to expand its user base through a free-access strategy. Microsoft underscored that “the next billion AI users could emerge from the Global South, where open-source innovation is flourishing,” warning that U.S. AI companies must not neglect these regions.

Leading U.S. AI firms also recognize China’s rapid ascent. In a CNBC interview on the 19th, OpenAI Chief Executive Officer Sam Altman stated that “the progress of Chinese technology companies across the entire tech stack is remarkable—not only in AI but in many other areas.” Asked whether Chinese firms had surpassed or caught up with OpenAI, he responded, “In some areas yes, in some areas no.” The remarks reflect an acknowledgment that China, once a clear laggard in the AI race, has advanced t

Mounting International Alarm

Concerns over China’s rapid rise are proliferating across the international community. In its “2025 Article IV Consultation Report on China” released on the 18th, the International Monetary Fund (IMF) recommended that China reduce major industrial subsidies—currently estimated at around 4% of gross domestic product (GDP)—to 2% over the medium term. The IMF argued that large-scale subsidies have contributed to current account surpluses that adversely affect trading partners. Market analysts interpret the recommendation as targeting advanced manufacturing and AI industries, which have recently emerged as central pillars of China’s expanding trade surplus.

The U.S. Congress has moved to tighten restrictions on outbound American capital to China. The annual National Defense Authorization Act (NDAA), passed by the House of Representatives late last year, includes provisions allowing the government to restrict and review U.S. investments in Chinese companies operating in core technologies such as AI, advanced semiconductors, and quantum computing. The scope of regulation extends beyond mainland China to Hong Kong and Macau, as well as state-owned enterprises and firms linked to senior Communist Party officials. Regarding the legislation, House Speaker Mike Johnson stressed that “investments supporting the aggressive actions of Communist China must be halted.”

Despite such concerns, capital from the United States and other Western economies continues to flow into China’s AI market. U.S. investors have recently been actively purchasing shares of Chinese technology companies developing AI models and channeling funds into exchange-traded funds (ETFs) tracking broader Chinese tech equities. Venture capital firms based in China are raising dollar-denominated funds dedicated to AI investments, and several U.S. university endowments that had refrained from investing in China for years are reportedly considering a resumption of allocations.