China chips away at U.S. AI moat
Speakers
Deirdre Bosa — Tech Check Reporter
— CNBC anchor, tech reporter
Summary
- China is successfully bypassing US export controls, allegedly using Nvidia Blackwell chips to train new models like DeepSeek, proving that hardware bans are failing to stop their progress.
- A "distillation" strategy allows Chinese labs to query American models to extract intelligence, effectively cloning US IP at a fraction of the cost.
- Four of the top five most-used AI models globally are now Chinese (e.g., DeepSeek, Minimax, Kimmy), driven by a "good enough" and "cheaper" value proposition that threatens to commoditize the sector.
- The "US AI Moat"—built on controlling hardware and protecting proprietary models—is eroding, posing a deflationary threat to US Tech giants (Mag-7) similar to the impact of Chinese manufacturing on global exports.
Trade Ideas
"The case for keeping the China market open is getting a lot harder to make... Deep Seek used Nvidia Blackwell chips... raises the harder question... where is America's moat?" While the use of Blackwell chips proves Nvidia's hardware is indispensable (bullish for demand), the political fallout of China bypassing bans will likely force the US government to close loopholes aggressively. This creates regulatory risk for Nvidia's revenue and challenges the narrative that the US controls the hardware "moat." WATCH for earnings volatility and regulatory news. Stricter bans could cut off gray-market flows or official China-specific chip revenue entirely.
"If users perceive this as somewhat of a commodity... they could do to AI and to our Mag-7 the same thing that they did with global exports." The US tech valuation premium relies on AI being a scarce, high-margin proprietary asset. China is flooding the market with "good enough," cheaper, open-source models created via distillation (copying). If AI intelligence becomes a commodity, the pricing power and margins of the "Mag-7" will collapse. SHORT/AVOID US mega-cap tech exposed to AI model commoditization. US models may maintain a "frontier" capability gap that enterprise clients require, justifying the premium.
Deirdre Bosa
Anchor/Reporter, CNBC Tech Check
"Four of the five most used models in the world are Chinese... These are all sort of the top Chinese AI labs backed by Alibaba." Chinese AI labs (DeepSeek, Minimax, Moonshot) are winning the volume game by offering efficient, cheaper alternatives. Alibaba is explicitly identified as the primary backer of these top labs, making it the direct equity proxy for this surge in Chinese AI adoption. LONG BABA as a proxy for the success of the underlying Chinese AI ecosystem. Geopolitical sanctions could further isolate these companies or delist Chinese equities.
