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Chinese internet giants have adopted a more cautious stance on artificial intelligence investments compared to their American counterparts, with no evidence of the so-called “circular financing” that often fuels speculation of an AI bubble in China, according to a UBS Securities analyst.
Leading Chinese internet companies are projected to spend approximately 400 billion yuan (around $56.6 billion) on capital expenditures this year, roughly one-tenth of the investment level of their U.S. competitors. Despite this, both groups have developed AI models demonstrating comparable performance, noted Xiong Wei, a China internet industry analyst, in a report dated December 5.
Data from third-quarter financial reports show that Chinese cloud service providers allocate around 10% of their revenue and 50% of their operating cash flow to capital expenditures. In contrast, U.S. giants dedicate approximately 27% of revenue and 71% of operating cash flow to such investments.
Chinese-leading AI model developers are mainly financed through their parent companies’ internal cash flows, rather than third-party funding. This stands in contrast to the U.S., where circular financing—where a company invests in another that then uses the funds to purchase products from the original investor—is more prevalent. For example, Nvidia, a major U.S. chip manufacturer, announced a plan in September to invest up to $100 billion in OpenAI, with the intention of purchasing millions of graphics processing units to build the necessary AI infrastructure.
Market analysts express concerns regarding this circular financing model. A recent research report from Citic Securities estimates a 60% chance that OpenAI could face operational challenges within the next year, leading to more rational investment behaviors in the AI industry. The report also suggests a 20% probability of achieving significant breakthroughs or an AI bubble burst.
While China’s AI models are expected to rapidly advance and catch up to U.S. capabilities next year, the application markets in China are anticipated to be more fragmented compared to the dominance of ChatGPT and Gemini in the United States, according to UBS Securities.
In terms of commercialization, China and the U.S. are pursuing similar strategies, focusing on cloud services, advertising, and expanding the range of application scenarios such as AI agents, AI-driven native advertising, multimodal systems, and edge AI, the firm added.
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