Analysis

China’s economy is spluttering. Fueled by an extremely shaky property sector–including the delisting of the country’s largest real estate giant from the Hong Kong Stock Exchange–stalling manufacturing, and a strained trade relationship with the US, China’s economy needs help. The CCP’s announcement of its new AI+ plan (人工智能+) is therefore important because the West needs to understand how China’s political and business leaders intend to integrate AI throughout the economy. But AI also has political implications; it is crucial for how the party intends to maintain power by demonstrating its governance capacity and ability to stimulate economic growth. AI will also enhance the CCP’s already daunting mass societal surveillance. For CCP leaders, AI is not just another tool; it is arguably the mechanism through which the party sees a potential route for persisting and tightening political control.

This means that China’s AI and tech industry innovators will likely come increasingly under the CCP’s watchful eye; the stakes are too high for the party to allow the private sector to innovate alone. The AI+ plan, for example, underscores the party’s desire to see enhanced cooperation among the state, state-owned enterprises, private companies, and universities in developing supercomputing and chips, both of which are currently at least partially dependent on imported technology (see “Tech Futures” below). It also underlines how China is approaching AI as a countrywide strategy, including developing domestic software, semiconductors, data centers, and electricity generation capabilities, and implementing AI throughout the Chinese economy and society. Ultimately, by 2030 the AI+ plan aims for 90% AI penetration across China’s economy, with the AI economy driving growth. 

For US companies engaging with Chinese partners or suppliers, maintaining these engagements will come at an increasing risk of IP theft through sharing company information with Chinese AI platforms that will be increasingly integrated within their partners’ business practices. It also means that shared technological, scientific, or corporate research with Chinese partners will pose compliance risks in the US as the likelihood of these partnerships touching China’s AI platforms–and therefore platforms that are accessible to the CCP or even the Chinese military–will dramatically increase. As AI becomes more integrated into China’s economy at the CCP’s behest, US companies will therefore need to understand that the risk of engaging with Chinese partners will also dramatically increase.

Analysis

The US government will need partners to combat the growing global reach of the CCP. It therefore took many–including former Republican presidential hopeful Nikky Haley–by surprise this week when the US announced that it would increase tariffs on India in response to New Delhi’s continued purchase of Russian oil. The announcement came a few weeks after the US government initially announced tariffs, which has already precipitated a range of diplomatic moves from India, including reestablishing erstwhile strained relations with Canada and China. Chinese diplomats have already started making inroads with Indian counterparts to reset relations at the US’s expense. India’s Prime Minister Narendra Modi emphasized his country’s push for self-reliance in a backhanded swipe at the US government, adding to an alleged snub of the White House’s attempts to reach the Prime Minister in recent days.  

Indeed, those who tune in to our monthly Red Report Live will know that our team recently visited India to better understand how the country’s shifting relations with the US and China were being felt on the ground. One clear takeaway was the tone shift by Indian media–long a critic of China–to criticize the United States and emphasize India’s leadership within the BRICS group of developing countries. Moreover, Indian media underscored the perceived hypocrisy about other states’ continuing oil purchases with Russia (like the EU) without being suffering punitive tariffs from the US government. 

If India increasingly identifies its shared interests as aligning more with China than the United States, encouraged by the US government’s increased tariff pressure, then India’s potential as an alternative and “safer” investment destination than China for global manufacturing may be in jeopardy. Continued US tariffs are pushing some companies to reconsider relocating operations from China to India, with the potential that US companies may face additional political troubles in India as retaliation. While India is far from a risk-free destination for US companies, its potential role in ensuring China-free supply chains, particularly for the tech industry, will likely face additional complications that increase risks. Pressuring India to find an alternative oil vendor, and the consequent unfolding geopolitical spat, is therefore as much a story about China as it is about US trade policy or the US’s relations with India.

Analysis

In the previous issue of the Red Report, we discussed the burgeoning trend of the US government to take stakes in private corporations as a precondition for permitting them to do business. In this issue, we will take a deeper look at the implications of this change through the case study of recent developments in Nvidia’s government gamble.

Mere weeks after Nvidia secured the US government's permission to once more sell their H20 chips to China, the company is already having to change course. The deal came at a high price for Nvidia, as they had to promise 15% of their sales of that chip to the US government. There may, however, be little in the way of payout. As soon as the deal was made, it reignited earlier speculation among Chinese media that the chips possessed a “secret backdoor” that would allow the US government to spy on China, followed by accusations that major companies, like Tencent and Bytedance, were still secretly purchasing the chips. This level of negative coverage led the Chinese government to advise companies to not purchase the chips, which is the practical equivalent to banning their purchase. Now, Nvidia has had to cancel production of the H20 chips, causing their shares to drop significantly in Q3 despite continued meteoric growth. As the company devises new market solutions, they are reportedly developing a new, more powerful chip to sell in China. Whether or not the US government will permit the sale, however, remains to be seen, and Nvidia CEO Jensen Huang is currently in negotiations with the administration. 

Nvidia is representative of a new and peculiar feature of the Trump administration, which has been its shift toward state capitalism or the government’s management of what is purportedly considered to be the “private” sector. The US government first took a “golden share” in US Steel as the precondition for approving the company’s acquisition by Nippon Steal. This was followed by the recent deal with Nvidia (that was also replicated with AMD), and suggests a new requirement for doing business in America. Expanding this possibility, U.S. Commerce Secretary Howard Lutnick is currently considering taking equity stakes in companies that want CHIPS Act grants, the first attempt at which manifested in the US government demanding a 10% share in Intel for such monies. Further complicating this process, congress is also currently considering the No Advanced Chips for the CCP Act of 2025, which would additionally require congressional approval for the foreign sales of semiconductors (on top of government agreements made for profit sharing or national security-related “golden shares.”)

The involvement of the US government in private businesses’ internal affairs creates a range of new complications for companies operating in the US. The most direct is the potential loss of revenue that will be incurred by having to share a percentage of one’s earnings with the government, which is essentially a separate, flat tax on doing business. The indirect risks are perhaps more grave. One reason that Chinese companies like Tiktok or Huawei have come under CFIUS and other government agencies’ scrutiny is precisely because of their opaque corporate structures and ties to the Chinese government. If the government has a stake in a private company, the logic goes, then that company may also have unspoken obligations to its government. This logic similarly extends to the US government’s potential involvement in US businesses, and China’s rejection of Nvidia’s H20 chips is a perfect example of this. 

The clear takeaway from this episode is that the reputation of US companies as independent, market-aligned institutions may begin to erode if the government continues to intervene, and it may, in turn, become more difficult to do business. This is all the more true as many countries have laws restricting their domestic companies from engaging international companies with ties to foreign governments. Consequently, the potentially small share of profits given to the US government may ultimately lead to much greater losses as future business deals dry up.

Analysis

DeepSeek, a prominent Chinese AI startup, recently delayed its R2 model launch from May 2025 after months of failed attempts to train the system using Huawei's Ascend chips. The company ultimately reverted to Nvidia's H20 GPUs for training, relegating domestic chips to inference tasks only, after experiencing persistent issues with hardware stability, interconnect performance, and software integration despite on-site support from Huawei engineers.

This technical failure highlights the scale of China's semiconductor challenge. According to US Commerce Under Secretary Jeffrey Kessler, Huawei will produce no more than 200,000 Ascend AI chips in 2025. By contrast, SemiAnalysis reported that China received over 1 million Nvidia H20 chips during just the last nine months of 2024. While Huawei projects its next-generation Ascend 910d will match Nvidia H100 performance at 60-70% of the cost, current domestic alternatives cannot reliably handle large-scale AI training workloads.

The incident coincides with shifting US export control policies. The Trump administration initially backed off H20 chip sale bans after Chinese stockpiling, then announced the US would allow Nvidia to sell the chip, but take 15% of Nvidia's H20 revenue from China. Major export control updates in December 2024 and January 2025 maintained focus on semiconductor "chokepoint" technologies, though some analysts suggest these restrictions may be "boomeranging" by potentially isolating the US rather than effectively containing Chinese advancement.

DeepSeek's experience reveals the persistent hardware-software integration challenges facing Chinese AI development. Despite substantial government investment, domestic chip ecosystems remain insufficient for cutting-edge AI training, forcing continued reliance on modified US hardware. This suggests China's path to AI technological parity remains a medium-to-long-term objective rather than an immediate possibility. This also raises questions about why the US government allows China access to chip technology that China itself cannot replicate.

Analysis

China’s innovation explosion, exemplified by this year’s “Deepseek Moment,” caught many in industry, the markets, and in foreign governments by surprise. Yet cases of Chinese-sponsored IP theft against Western companies continue unabated, including by soliciting sensitive corporate information from company insiders, targeted hijacking of web traffic or through phishing, employee poaching, or via US-based entities that serve as a front for predatory Chinese parent companies. If China is prioritizing domestic innovation and trying to design technologies that are entirely separate from their Western counterparts, then why does it still consistently sponsor IP theft from these companies? 

For starters, China sees technological innovation as broadly zero sum. This is to say that an advance in Chinese technology, according to the CCP, must come at the expense of US innovators. This, the logic goes, undermines US corporate competitiveness, and, by extension, US national security. A major tactic by which the CCP aims to undermine the US’s economic, technological, and military readiness is therefore to target the US economy. The overwhelming majority of Chinese IP theft, for example, has purely commercial applications. Commercial advantage to the CCP ultimately equates to geopolitical and military advantage. This is updated mercantilism; broadly speaking, the CCP aims to put the United States out of business.

Second, although the CCP and the Chinese state are integrated into China’s corporate sectors, particularly the tech sector (as we note above in “From Zhongnanhai”), China’s private sector, including its tech giants, still must pursue profits like any other company. This means that while the CCP is heavily involved in boosting China’s private sector, these corporations still need to generate profits through sales and new products, which increases the pressure on these companies’ to gain any advantage they can over both international and domestic competitors. This involves innovation and theft in combination. In a country with weak IP enforcement laws, this means that IP theft is not only about replicating tech or other company information, it is also about knowing what competitors are up to and therefore how to undercut them. This fierce, no-holds-barred competition is particularly salient when it involves Chinese extraction of IP from foreign companies–which is broadly encouraged by the CCP–but it also characterizes China’s domestic tech competition.

Collectively, this means that corporate espionage will remain a key part of the CCP’s playbook, in particular targeting the US private sector and the global tech industry. It is not only an ingrained strategy in how the CCP directs China’s private sector to serve as an extension of the party and the party’s priorities, but it is also endemic to China’s legally weak, domestic economic competition. China does not steal Western IP because China can’t innovate, but rather because China’s companies are incentivized to steal when they can, and because the CCP’s ambitions are to defeat the US at any cost. The US private sector is a key vulnerability to be exploited. US companies, particularly if they touch on tech or scientific research, therefore need to be extremely vigilant against the types of attacks and infiltration highlighted above, because even if US companies are not interested in China, China is very much interested in them.