Macroscope | Why DeepSeek Disruption is a China Risk Wall Street Can't Ignore

Since the downfall of China Evergrande Group in 2021, which sparked a major crisis in the Chinese property market, Wall Street has largely remained indifferent to the risks emerging from the world’s second-largest economy.

Excluding the ongoing US-China trade conflicts, the last time China was perceived as a significant threat to the markets was in 2016. During that period, investors were most worried about a possible hard landing for the Chinese economy, according to a monthly survey by Bank of America.

Despite the investment community downplaying risks specific to China, the nation remains central to the geopolitical tensions that have increasingly disrupted global asset prices over recent years. One key area of concern is the thriving US technology sector, particularly dominated by the 'Magnificent Seven' tech stocks. These companies significantly contributed to stock market growth in 2023 and 2024, largely driven by excitement over advancements in generative artificial intelligence (AI).

On January 27, the upward trend in AI-driven stock prices faced a jarring disruption from DeepSeek, a little-known Chinese AI startup. They introduced a large language model that reportedly performs as well as those produced by major Silicon Valley competitors while using substantially less computing power and, consequently, at a lower cost.

While the validity of DeepSeek’s claims remains to be thoroughly evaluated, the company’s open-source model, which allows developers to access and enhance the software, has generated significant excitement in the AI community. Over the last weekend, the company's mobile application surged to the top of Apple’s iPhone download charts. Venture capitalist Marc Andreessen referred to DeepSeek’s innovation as “AI’s Sputnik moment,” alluding to the Soviet Union's launch of its satellite that ignited the space race in the late 1950s.

Investor reactions suggest that DeepSeek's breakthrough may have far-reaching implications, casting doubts on the United States' dominance in AI technology and challenging the notion that this field's future necessitates ever-growing investments in chips and infrastructure.

China, AI, Investment, Technology, Volatility