DeepSeek: Another piece in the puzzle of China’s post-bubble recovery
Its founder Liang Wenfeng has forged a new path forward within the ongoing AI race
AS CHINA celebrated Chinese New Year, the rollout of DeepSeek – a Chinese artificial intelligence (AI) startup – upended investors’ understanding of competition in the AI space.
While AI experts will divine the implications of DeepSeek on the industry, investors should not underestimate the importance this development could have for China as a whole, as it continues to move through its post-bubble restructuring.
Recall from 2015 to as recently as mid-2024. China struggled to replicate the measures that many countries implemented following their own respective domestic real estate bubbles. However, late last year, we outlined that finally, China had begun moving down a similar path – signalling more coordinated monetary and fiscal policies, an acknowledgement that bank recapitalisation would be needed, and seeing some weakness in the yuan.
Though we viewed the measures as necessary steps based on our framework, to date they remain too tepid to suggest that the restructuring or reform effort has truly turned the corner.
While more forceful policies like those eventually implemented in Europe and Japan are likely necessary, a key difference between the US’ durable post-2008 recovery and more muted recoveries seen in Japan since 2013 (Abenomics), or even in Europe since 2011 (Mario Draghi’s “whatever it takes”), has been America’s success at creating new industries.
These industries supplant the workers displaced by the bursting of the 2008 bubble and take over as an economic growth driver as bubble-linked sectors recapitalised and restructured. The US has, for example, risen to become the world’s leading oil producer, as well as invented and built the “influencer” culture via the social media revolution.
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Indeed, researchers from Harvard University and the Interactive Advertising Bureau estimated that by 2021, the proliferation of social media alone created nearly 14 million new Internet jobs in the US since 2008 – nearly 10 per cent of pre-2008 crisis overall employment levels.
This transformation of the employment and economic landscape is a similar objective that China has been pursuing for almost a decade now. We suspect the DeepSeek development can add another crucial step along China’s path to achieving a similar outcome.
While China has long been America’s foil in the race for AI leadership, until now both appeared to be pursuing a similar approach – heavy investment in high-performance chips on which AI models would be trained. With the race close, the US then sought to tilt the competitive landscape by restricting access of key inputs to China’s efforts.
In the face of this obstacle, the DeepSeek development suggests that its founder Liang Wenfeng has forged a new path forward within the ongoing AI race – a path which appears, at first blush, decidedly less reliant on US and US-allied technology to move forward.
So, just as the US used the combination of a new energy industry (shale oil) and a new technology-driven industry (social media) to spur employment and economic growth, China has to date already invested heavily and taken global leads in renewables and electric vehicles. Now, with DeepSeek, it has created a potential triumvirate as it forges an alternative way forward in AI.
Impact of AI
Thus, should DeepSeek’s approach lower the cost of training new AI models, effectively democratising AI much like social media democratised the global media landscape, China could more rapidly enter the innovation phase of the AI cycle. This supports new, private business formation, new forms of employment and potentially private consumption growth.
Undoubtedly, AI will come with some costs in the form of job losses, just as the Internet and social media did before it. However, as with the history of innovative technologies, the hope is that in this iteration, new industries, new roles and new jobs – not currently conceived – will take shape exceeding the number of jobs lost in the process.
Just as China’s foray into electric vehicles disrupted its internal combustion engine vehicle industry, Carlos Casanova, UBP Asia economist, noted that the sector has directly created three million new jobs and as many as 5,400 companies through 2023.
Undoubtedly, it is too early to conclude these prospects with certainty. But just as we have seen the incremental progress since August 2024 towards putting in place the necessary foundational elements (joint monetary/fiscal policy, bank recapitalisation and a weaker currency), DeepSeek may similarly represent another important step forward for China along its road to restructuring and reform in its own post-bubble era.
For long-term investors who are disappointed by China’s measures since they hoped for “whatever it takes” announcements last year, stock selection – focused on industries set to lead the economy going forward, such as exporters in Japan and Europe, and social media and shale in the US – is key to sidestepping the ongoing turbulence associated with the repair of the domestic economy.
Tactical investors should likewise recognise that, as seen in Japan before, cyclical opportunities have periodically presented themselves. For MSCI China, those opportunities present themselves when it trades between 10 and 11 times earnings, we estimated.
While DeepSeek may have meaningful repercussions for the AI industry as a whole, investors should not overlook the potentially important implications this AI startup may have for China’s economy overall, adding another key step forward in China’s path towards economic reform and restructuring.
The writer is group chief strategist at Union Bancaire Privee, a private bank and wealth management firm
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