MW China's trillion-yuan gamble on AI and chips is creating strange bedfellows

Tanner Brown

As U.S. export controls bite, China's tech giants and local governments are forging unlikely alliances - Huawei's with rival SMIC, for one - to build a parallel ecosystem

China's bold push to achieve tech self-sufficiency is triggering a wave of unexpected corporate alliances, investment surges and speculative bets.

As U.S. sanctions choke access to advanced semiconductors and artificial-intelligence hardware, Beijing is responding with a top-down industrial mobilization - and an estimated trillion dollars' worth of combined public and private capital now flowing into domestic chip and AI startups.

From obscure provincial funds pouring cash into barely tested firms to deepening cooperation between longtime rivals like Huawei and SMIC, the country's attempt to build a homegrown tech stack is reshaping its business landscape in real time.

'The government is throwing everything at the wall trying to see what sticks.' Kane Hu, Peak Investment

"There's an almost wartime mentality about semiconductors and AI right now," said Kane Hu, chief analyst at tech-focused Peak Investment, a boutique brokerage in the western city of Chengdu, which handles roughly 80 clients and around 100 million yuan, or $15 million, in assets.

"The government is throwing everything at the wall trying to see what sticks," he told MarketWatch.

A trillion-yuan sprint

China's central government has prioritized semiconductors as the centerpiece of its tech strategy since at least 2014. But the urgency has escalated dramatically since 2019, when the U.S. first placed Huawei on a trade blacklist. Now, with further U.S. curbs targeting Nvidia's $(NVDA)$ highest-performance AI chips, China is scrambling to ensure that its AI ambitions don't stall.

The latest phase is powered by state-backed megafunds like the China Integrated Circuit Industry Investment Fund - nicknamed the "Big Fund" - which launched a third round of financing targeting over 300 billion yuan ($41 billion). Add to that a profusion of local government tech funds and stimulus from the People's Bank of China's re-lending programs, and analysts estimate more than -Yen1 trillion ($138 billion) could be funneled into the sector this year alone.

That money is going to a mix of promising firms, state-backed behemoths, and speculative players. For instance, in March, Zhipu AI announced around -Yen1 billion ($137 million) in new state-backed funding.

According to a Bloomberg analysis, the U.S.-led crackdown has provided "a huge incentive for Chinese firms to improve their capabilities, move up the value chain, collaborate amongst themselves, and galvanize more government support to firms like Huawei that are driving the industry forward."

Huawei and SMIC: From competitors to collaborators

Under escalating pressure applied by U.S. export controls, previously siloed companies such as Huawei and SMIC are deepening their cooperation to support China's tech sovereignty.

As a Wilson Center report on China's export-control strategy noted: "American export controls drove these two firms to collaborate with each other when Huawei-designed chips no longer could be manufactured by non-Chinese foundries, thus leading Huawei to source manufacturing services from SMIC."

This shift became visible in the surprising release of the Huawei Mate 60 Pro, featuring a domestically manufactured 7 nm Kirin chip - an achievement possible only through the combination of Huawei's design expertise and SMIC's upgraded lithography capabilities.

A parallel AI ecosystem?

With access to cutting-edge Nvidia GPUs limited, China's AI firms are improvising. Baidu $(BIDU)$ (HK:9888) and Alibaba $(BABA)$ (HK:9988) are developing models optimized for older chips. Domestic chip manufacturers like Biren and Moore Threads are racing to provide replacements for Nvidia's banned products.

Huawei founder Ren Zhengfei has acknowledged that the company remains a generation behind U.S. rivals like Nvidia but emphasized that strategies such as cluster computing and chip stacking are enabling progress.

But performance gaps remain - and some researchers are quietly stockpiling Nvidia hardware where possible.

From the archives (April 2025): Microsoft is quietly integrating DeepSeek's technology. What that means for AI stocks.

Also see (January 2025): DeepSeek could represent Nvidia CEO Jensen Huang's worst nightmare

This technological bottleneck is prompting a bifurcation. On one track, top AI labs are forging ahead with domestic hardware, often sacrificing training speed. On another, smaller companies are increasingly focused on narrow, commercially viable use cases like financial modeling or AI customer service - less demanding than frontier models but easier to scale with existing resources.

Bubble risk - or a foundation for resilience?

All this raises a familiar question: Is China sowing the seeds of innovation or a speculative bubble?

In some Chinese provinces, chip parks and AI zones are being built at breakneck speed.

Local governments are keen to show results. In some provinces, chip parks and AI zones are being built at breakneck speed - some before their anchor tenants are even profitable. Venture-capital firms and state banks alike are under pressure to back "national priority" firms, sometimes with minimal due diligence.

Yet even U.S. officials acknowledge the long-term consequences.

"China is investing huge amounts to increase its AI chip production, as well as the capabilities of the chips that it produces," Commerce Department official Jeffrey Kessler told a recent congressional hearing. "So it's critical for us not to have a false sense of security, to understand that China is catching up quickly."

Tanner Brown covers China for MarketWatch and Barron's.

More Tanner Brown dispatches:

What is a '996' work culture, and why are young professionals in China giving it the cold shoulder?

Inside China's quiet pension-funding crisis

What investors need to know as China quietly ratchets up support for its stock market and tech sector

China's economic miracle appears to be in the past. Here's why the future looks bleaker and bleaker.

Foreign brands are back in China. But the economy has cooled and domestic competition is dug-in.

-Tanner Brown

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June 17, 2025 17:48 ET (21:48 GMT)

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