This year began with a moment reminiscent of the Sputnik launch for China. On January 20, a relatively unknown Chinese artificial intelligence lab unveiled DeepSeek, a cutting-edge AI tool that quickly gained global attention. DeepSeek’s R1 demonstrated the ability of Chinese researchers to rival leading U.S. models like ChatGPT, even with a smaller budget and less advanced hardware.
A “Sputnik Moment” and Market Reaction
The arrival of DeepSeek triggered significant stock market repercussions for U.S. tech giants. Nvidia experienced a 17% share drop on January 20 alone, resulting in a $593 billion loss – the largest single-day loss ever for a company, and it took six months to recover.
Notably, DeepSeek’s CEO, Liang Wenfeng, appeared on state-run television in Beijing and met with Premier Li Qiang, China’s No. 2 official. This signaled a swift embrace of the company by Chinese leadership, who hailed DeepSeek as a “national champion” in their pursuit of global technological leadership.
Innovation Under Control
This event highlighted the complex relationship between innovation and authority within China. The country has demonstrated an ability to achieve technological breakthroughs despite strict government controls. Policymakers can stimulate industrial advances, but success isn’t guaranteed, requiring a balance between state direction and entrepreneurial freedom.
China previously defied expectations by building the world’s largest web surveillance system, despite predictions that controlling the internet would be impossible. Beijing allowed internet access to expand, but under heavy censorship and behind the “Great Firewall.” Now, the country is applying similar strategies to the development of artificial intelligence.
“We were wrong about the barrier that censorship would pose towards China’s development of large language models,” stated Jeffrey Ding, a political scientist at George Washington University. Chinese companies have proven capable of enforcing censorship while simultaneously driving innovation, and AI is now being used to enhance speech controls.
Trade War and Economic Realities
The DeepSeek development occurred against the backdrop of a deepening U.S.-China trade war. In April, tariffs imposed by President Donald Trump escalated into a tit-for-tat conflict, with both sides levying tariffs exceeding 120% on each other’s goods. This led to factory work stoppages and layoffs as the $660 billion bilateral trade flow began to diminish.
In the trading city of Yiwu, merchants faced challenges exporting goods to the U.S. due to the tariffs. “We are here with a lot of Christmas decorations, but we can’t export them to the U.S.,” lamented trader Fernando Lu. Merchants were forced to seek new markets to survive, as China’s manufacturing capacity exceeds domestic demand.
Despite the decline in trade with the U.S., China’s overall exports grew 6% year-on-year in the first three quarters of 2025. A trade truce was agreed upon in October between Mr. Trump and Chinese leader Xi Jinping, but Yiwu’s entrepreneurs remain cautious.
Life on the Margins
Beyond the headlines of technological advancement and trade disputes, the economic realities for many Chinese citizens remain difficult. A chance encounter with a friend, referred to as “ayi” or “auntie,” underscored the struggles faced by those on the economic margins.
An illiterate migrant worker from eastern China, auntie cycled through menial jobs to support her family. Despite her hardships, she remained optimistic. She invited me to her home, a modest basement room, and shared roasted peanuts from her village.
Hundreds of millions of Chinese citizens lack the skills needed for jobs in the high-tech sector and receive limited welfare benefits. They rely on resilience and hard work to survive. Surveys indicate growing pessimism among Chinese citizens regarding their economic prospects, with many blaming inequality and an unfair system.
Economic grievances are contributing to increased protests and a rise in “revenge against society” attacks, including stabbings and car-ramming incidents.
Despite these challenges, China’s leadership believes in the resilience of its people. Auntie’s excitement about her son’s upcoming marriage and the arrival of her first grandchild exemplifies this enduring hope.
Frequently Asked Questions
What was DeepSeek and why was it significant?
DeepSeek is a cutting-edge artificial intelligence tool launched by a little-known Chinese lab on January 20. It was significant because it demonstrated China’s ability to develop AI capabilities rivaling those of leading U.S. models, despite having a smaller budget and less advanced chips.
How did the U.S. react to the launch of DeepSeek?
The launch of DeepSeek sparked stock market sell-offs for U.S. tech firms like Nvidia, Meta, and Microsoft. Nvidia alone lost $593 billion in market value on January 20, the largest one-day loss for a company ever.
What is the relationship between the Chinese government and companies like DeepSeek?
Initially, DeepSeek was a surprise to Beijing. However, the Chinese leadership quickly embraced the company, hailing it as a “national champion” and demonstrating a willingness to support and promote homegrown technological advancements.
How will China balance the need for control with the need to foster innovation in the future?
