[Market Brief] The New Cold War in Technology: In-Depth Report on US-China AI Competitiveness

What we want you to know is:
In March, the U.S. Federal Reserve’s FOMC held the benchmark interest rate steady in the 3.50% ~ 3.75% range. The rate dot plot also maintained a path of 1 basis point of rate cuts in 2026, and against a backdrop where the situation in the Middle East remains unclear, the committee issued SEP estimates with modest upward revisions to economic growth, inflation, and productivity. Meanwhile, Finance M Square provided scenarios for oil prices, inflation expectations, and interest-rate developments!

Key points of this article:

2. China has moved on from the “keep above 5” era. This isn’t a slowdown in growth rate—it’s a high-stakes bet on upgrading its economic structure, fully wagering on China’s AI fortunes.

3. Under the squeeze of America’s chip crackdown, China’s supply chain is launching a desperate counterattack. Global supply chains have officially drawn the “Iron Curtain” in the context of a technological Cold War.

4. With open-source large models plus a C-end breakout strategy, can China’s major internet software companies win in the AI era?

5. Physical AI: the gateway for AI to the real physical world! How do you become the final ace that will flip the balance in the U.S.-China tech game and define the future of technology?

I. Abandoning the “keep above 5” growth goal! Moving from total-demand stimulus to structural reform

We start with the government work report from China’s Two Sessions in early March, observing China’s changes from the top down. In the report, we see two key points. First, the policy focus of China’s economy is further shifting away from past total-quantity targets and accelerating toward more precise structural transformation. The most obvious adjustment is the GDP growth target for this time, revised from the previous 5% to a range of 4.5% ~ 5%—the first time since 2023 that China has abandoned the 5% target.

Such adjustments show a shift toward prioritizing the “quality” of economic growth over the “quantity.” This principle is also reflected in fiscal and monetary policy. On the fiscal side, China structurally slows the growth rate of local government debt, with the central government taking on more of the deficit. On the spending side, the focus is also more on people’s livelihoods and technology, with a reduced share of infrastructure investment. On the monetary side, China continues to maintain a loose stance, but compared with traditional broad tools such as reserve requirement cuts and interest rate cuts, it places more emphasis on structural monetary policy tools, such as operations involving government bonds, to achieve precise liquidity management.

The second key point, without a doubt, is technology,

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                                            When China abandons the “keep above 5” goal, how does its economic policy focus shift?
                                        
                                        

                                            💡China’s economic policy focus shifts from total-quantity targets to structural transformation, with the GDP growth target adjusted to 4.5% ~ 5%. Fiscal policy slows the growth of local government debt; the central government takes on more of the deficit, while the spending side emphasizes people’s livelihoods and technology. Monetary policy maintains a loose stance, but focuses more on structural tools such as government bond transactions to achieve precise liquidity control.
                                        

                                    

                                
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                                            How does the development of new quality productive forces affect China’s structural economic transformation?
                                        
                                        

                                            💡New quality productive forces, as a synonym for high technology and new drivers, are the key to China’s structural economic transformation. Officially, overall GDP growth is played down, and structurally the share of technology is required to be raised, with the share of the digital economy in GDP increased to 12.5%. Through industrial upgrading, the economy is transformed from the ground up to meet the challenge of the U.S.-China technology competition.
                                        

                                    

                                
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                                            In the face of America’s chip “choking,” how does the China-based supply chain mount an all-out counterattack?
                                        
                                        

                                            💡Faced with America’s chip “choking,” China-based supply chains are compensating for a shortage in compute capacity from any single chip through innovations in system engineering architecture. Taking Huawei as an example, its data-center racks are packed with large numbers of chips. Through high-speed interconnection using communications technology, the AI battlefield is shifted toward system integration and the ability to connect multiple chips—providing invaluable solutions for domestic CSP providers. In addition, in other non-chip supply-chain links, the advantages of China as the world’s factory in costs and supply-chain clusters are fully leveraged.
                                        

                                    

                                
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                                            How does China’s forward-leaning deployment in power infrastructure affect the development of AI?
                                        
                                        

                                            💡China’s forward-leaning deployment in power infrastructure, such as the “East Data to West Computing” project, uses green power generation resources in western regions to provide strong bottom-layer support for AI compute centers. However, despite the huge power advantage, actual utilization capacity is still limited by chip supply bottlenecks, making it difficult for power advantages to be fully realized in the near term. As a result, growth in power load for U.S. data centers still leads China.
                                        

                                    

                                
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                                            How can China’s internet software giants break through the AI market via C-end applications?
                                        
                                        

                                            💡China’s internet software giants, such as Alibaba and ByteDance, use high value-for-money open-source models and large internet user bases to break through at the C end. For example, Alibaba’s QWEN AI integrates the software ecosystem more deeply through promotional campaigns, enabling hundreds of millions of users to experience AI shopping, moving AI from chatbots to agents and real consumption scenarios.
                                        

                                    

                                
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                                            How can Physical AI become a key factor in China’s effort to flip the U.S.-China tech power balance?
                                        
                                        

                                            💡Physical AI has become a key factor in China’s effort to flip the U.S.-China tech power balance. China is faster in industrialization and in rolling out regulations. For example, L3-level automated-driving vehicles have been approved for road testing, and China is taking a more aggressive approach to automated driving. In the field of humanoid robots, Chinese companies are far ahead of U.S. giants in shipment market share. Backed by a complete manufacturing industry, forward-looking regulation, and large volumes of data, China aims to catch up with the U.S.
                                        

                                    

                                
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                                            Under the U.S.-China tech Cold War, what key investment directions should investors focus on?
                                        
                                        

                                            💡Under the U.S.-China tech Cold War, investors should focus on data-center compute power (semiconductors), power (power grids and energy storage), and their spillover supply chains (memory storage, heat dissipation, and other components). These sectors will remain in the long-term storm zone of the contest between the U.S. and China. While it may be easier for the U.S. to overcome power bottlenecks, China needs to continuously drive model innovation, build C-end business models, and leverage advantages in robotics and automated driving.
                                        

                                    

                                
                                                

                
                
                

                

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