The world of technology is undergoing a seismic shift, with China increasingly challenging the United States for dominance. Recent developments indicate that China is closing the technology gap at an unprecedented pace. While the US still leads in overall R&D spending and scientific innovation, China’s aggressive push toward technological self-reliance is raising serious questions about whether it will soon surpass the US as the world’s foremost technological power.
A key development triggering concerns in the US is the emergence of DeepSeek, a Chinese AI startup that recently made waves by developing a large language model (LLM) that competes with the best in Silicon Valley at a fraction of the cost. The Chinese’s company’s AI assistant not only topped Apple’s US App Store downloads but also caused significant market disruptions. Nvidia, Microsoft, and other US tech giants saw their stock values plummet, wiping out hundreds of billions in market capitalisation. The financial impact was staggering, with the S&P 500 tech sector suffering its steepest single-day decline since September 2020.
Nvidia alone lost nearly $590 billion in market value. The drop in Oracle CEO Larry Ellison’s net worth by $27.6 billion and Nvidia CEO Jensen Huang’s decline of $20.8 billion further highlighted the magnitude of the shock.
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This AI breakthrough has been compared with the Sputnik moment of 1957—the Soviet Union’s surprise satellite launch that ignited the US-Soviet space race. If AI is the defining technology of the 21st century, as many experts believe, then China’s success in developing competitive, low-cost AI could mark the beginning of a new era of technological supremacy. Leading Silicon Valley investors describe the Chinese contender’s progress as one of the most remarkable and unsettling breakthroughs, revealing the growing anxiety in the US about China’s rapid advancements in AI.
China narrowing the gap in R&D investment
Despite a slowing economy, China’s commitment to R&D has remained steadfast. The country’s R&D expenditure reached $496 billion in 2024, reflecting an 8.3% year-over-year increase. China’s R&D intensity—the proportion of GDP spent on research—stood at 2.68% in 2024, steadily closing the gap with the US, which has maintained an R&D intensity above 3% for the past five years. The American Association for the Advancement of Science reported that in 2021, the US accounted for 32% of global R&D expenditure, while China contributed 27%.
However, China has overtaken the US in research publication output, producing 27% of the world’s peer-reviewed scientific publications in 2022, nearly double the US’s 14%. The Nature Index 2024 revealed that seven of the world’s top 10 research institutions are now based in China. The rapid rise in high-quality research output highlights China’s ability to generate cutting-edge knowledge, an essential component of technological leadership.
China’s steady R&D growth contrasts with its post-pandemic economic challenges. In 2021, the country’s R&D expenditure saw a 14.6% increase from the prior year, though the pace of growth moderated to 10.1% in 2022 and 8.4% in 2023. In contrast, US research publication rates have declined for the first time in decades. Between 2003 and 2022, science and engineering article output in the US grew by roughly one-third, whereas China’s increased tenfold. These trends suggest that China is strategically investing in innovation despite economic headwinds and is positioning itself as a serious contender in the race for scientific and technological dominance.
DeepSeek: Silicon Valley’s concerns and the economic fallout
The AI app’s rise has rattled Silicon Valley not just because of its technological prowess but because of its economic implications. The AI revolution in the US has been driven by vast computing power and multi-billion-dollar investments from major tech firms like OpenAI, Google, and Meta. Yet the app developed by China has demonstrated that state-of-the-art AI models can be developed for a fraction of these costs. If the AI app’s approach proves scalable, it could disrupt the prevailing belief that technological progress requires immense capital investments.
While OpenAI reportedly spent $1 billion to train ChatGPT, the Hangzhou, Zhejiang-headquartered company claims to have developed its latest AI model for just $6 million, leveraging a highly efficient approach that minimises computational requirements.
Investor concerns were evident in the sharp decline in the stock values of major AI-driven firms. Nvidia, a crucial supplier of AI chips, saw its market value drop by nearly $590 billion, the biggest single-day loss for any US company. Microsoft and other tech giants also faced significant selloffs, reflecting fears that DeepSeek’s low-cost AI models could undercut US firms reliant on expensive infrastructure. Meanwhile, the deep scepticism surrounding DeepSeek’s rapid rise has fuelled debates about whether China’s government provided financial backing or if the startup stockpiled US chips before Washington imposed export restrictions.
National security concerns for the US
China’s AI advancements have also reignited national security concerns in Washington. Under a 2017 law, all Chinese companies are required to cooperate with the Chinese government on intelligence matters, raising fears that DeepSeek’s AI could be used for espionage or data harvesting. The US has already imposed restrictions on exports of high-performance AI chips to China, but DeepSeek appears to have sidestepped these controls by stockpiling Nvidia chips before the ban and developing more efficient AI training processes that require fewer chips.
President Trump has warned that DeepSeek should be a ‘wake-up call’ for American industries, especially as Chinese AI dominance could challenge US influence in digital economies and cybersecurity. DeepSeek’s AI is also facing scrutiny over potential data privacy violations, given its Chinese origins and the company’s admission that it stores user data in servers located in China. Concerns over data security and the potential for government intervention in AI-driven technologies have heightened tensions between Washington and Beijing.
Will China take the lead
While China has made significant strides in AI, semiconductors, and research output, several factors still favour the US. The US continues to outspend China in R&D as a percentage of GDP, maintaining a stronghold in high-impact scientific papers and patents. Silicon Valley remains the global hub for innovation, attracting top talent and venture capital at an unmatched scale. However, China’s focus on technological self-reliance, coupled with its ability to develop cost-effective AI solutions, is a significant threat to US dominance.
China’s commitment to producing homegrown AI talent, as demonstrated by DeepSeek’s strategy of hiring only domestic engineers, is reshaping the global AI landscape. Liang Wenfeng, DeepSeek’s founder, has emphasised the importance of fostering originality in Chinese innovation. His company’s ability to deliver a groundbreaking AI model with a lean team of under 140 researchers signals a shift in how AI development could evolve.
The coming decade will be crucial in determining which nation ultimately leads the world in technology. If the US fails to counter China’s rapid advancements with equally innovative strategies, it risks losing its technological edge. Meanwhile, China’s ability to sustain its momentum amid economic and geopolitical pressures will determine whether it emerges as the world’s foremost technological powerhouse.