The expansion of artificial intelligence (AI) investment, both domestically and abroad, highlights a growing chasm between the U.S. and China. US capital spending on AI remains very robust. At the same time, China is increasingly adopting a nationalistic approach to its AI investments. This divergence is indicative of a deepening rift in the global supply chain. On both sides of the border, policy changes are fueling this transformation.
Since 2021, China has invested more than $100 billion in infrastructure spending—and with it, supercharged powers. Yet, this unprecedented scale of growth is met with unprecedented regulations requiring domestic production that could severely affect projects down the line. As we have written, the United States is currently drastically increasing its investment in AI. Even this ambitious endeavor wrestles with hurdles such as export controls and prohibitions on essential technology.
Strength of US AI Investment
US investment in AI capex is still booming as companies ramp up their investment efforts to get a competitive advantage. This commitment is evident in the stock market. Since the lows in April, the equity capital structure has come roaring back — regaining roughly $17 trillion in market cap. Though uncertainties persist, investors are confident in the future growth potential.
The US has already lost compute parity with China in some important domains. Washington’s export control measures have focused on key tools and equipment foundational to the development of AI, further muddying the waters for American firms. These regulations would impede access to cutting-edge technologies that are essential for ensuring our competitiveness in the global AI race.
Even with these challenges, a multitude of analysts are opining that the current picture on the ground in the US is bullish for some chosen capex beneficiaries. Companies prioritizing domestic substitutes will be the big winners as they move to align with the changing regulatory landscape. This pressure on one side continues to create opportunity on the other, though, and both industries are continuing to innovate, grow and collaborate.
China’s Nationalistic Shift
Nationalism is on the rise, particularly in China’s AI investment plans. The federal government has nudged agencies further still, requiring that data-center projects that benefit from state money use AI chips from domestic production. This directive comes in response to growing frictions with the US. Second, it illustrates Beijing’s broader strategy to shore up its domestic tech industry.
Reports indicate that construction sites under 30% completion have been instructed to remove foreign silicon or cancel their purchasing plans altogether. That unexpected policy shift has already sent some data-center projects scrambling to halt their plans. This illustrates very clearly how these misguided regulations are already having an impact on current projects.
China’s government is not just encouraging but actively trying to accelerate AI adoption. Their muscular command and control policy interventions are accelerating the J-curve in economic growth. Meanwhile, Beijing is encouraging domestic innovation and production to lessen its reliance on foreign technology. This major piece of strategy serves to strengthen China’s position in the growing international AI ecosystem.
Deepening Supply Chain Bifurcation
Together, the sharply divergent strategies on the part of the US and China have led to a rapid and deepening bifurcation of the global supply chain. As the US and China ramp up investment into AI, they are placing guardrails that direct the development of their technology ecosystems in specific ways.
For instance, while the US focuses on limiting exports to protect its competitive edge, China emphasizes domestic substitution to enhance self-reliance. This dual approach has fostered a Wild West environment where companies are forced to traverse a convoluted landscape of regulations and market forces.
As both countries scale up their funding, the impact this will have on global investors is huge. That bifurcation goes beyond supply chains, extending to investment strategies as well. Investors should pay close attention to how these federal policies will influence market opportunities and risks over the next few years.