China And “The Age Of AI”: Why The Power Of Artificial Intelligence Could Explain The Crackdown Vs China’s Tech Sector?

One of the more practical takeaways this book left us with was a far more profound appreciation of what is going on in China at the moment.

From the outside the approach of the Communist Party and Xi Jinping seems pretty strange.

As we have detailed a few times previously (here and here), the Chinese state is waging an incredible regulatory crackdown against their own companies (and investors) and rapidly and brutally bludgeoning their economy into a drastically different shape.

This looks bizarre from the outside and has clearly revealed the always extant authoritarian nature of China's regime.

But it leaves bigger question of: why??! It isn't necessarily very clear.

What has been very evident is that both the strength and the breadth of the campaign reveals China's determination to control certain strategic aspects of their economy. In particular, they have focused heavily on protecting and ring fencing their national data and the companies who generate it.

How exactly?

In June, the government passed the sweeping Data Security Law which has an incredibly wide remit. It joined the earlier Cybersecurity Law and Personal Information Protection Law to create a nexus of legal power that makes it nearly impossible for any company, foreign or domestic, to comply with the current corpus of Chinese law.

In other words, this new layer of regulatory control can be made to be really anything the state wishes it to be. It opens up endless options for state control and interference.

It also suggests it won't end any time soon. If the Chinese state can operate with legal impunity, it likely will.

Why would the CCP hamstring their tech champions like this?

It looks pretty bizarre from most perspectives except perhaps one:

  • National security.

Once you think about the power that these companies' AI capabilities will have then the sudden and wrenching Chinese policy shift starts making a lot more sense. And when the power of these new products are combined with the vast amounts of unique proprietary data that they will generate, it all starts to make a lot more sense.

It also isn't technically true that we never had any warning.

As with the earlier crackdown on state corruption, there was a trail of policy breadcrumbs and pronouncements and not from obscure officials either. Xi Jinping himself gave public speeches to this effect. In both 2016 and 2018 the General Secretary spoke at length about the critical need for China to strengthen its cyber- and data security.

It seems trite to say it now, but both Chinese companies and global investors should likely have paid far closer attention.

In an age when AI advances and insights could determine international supremacy as well as national security then suddenly the almost berserk focus on centralization and protecting a nation's data becomes not just a vital priority but also an unacceptable strategic risk.

The thinking is that if the state doesn't control the data then they cannot control the new artificial intelligence systems and this leaves other entities, whether private or public, in the driving seat.....

Reading the warnings and forecasts of Kissinger, Schmidt and Huttenlocher about our AI future you can understand why the Chinese state might take an expansive view of national security and become exceptionally paranoid about Western regulators (or investors!) having easy access to either the data or the AI capabilities of their companies.

Let us recap:

  • The China campaign will likely continue for the foreseeable future.

  • There will be no return to "business as usual" for data centric technology and systemically important sectors of the economy.

  • The current slate of solutions such as 1) listing in Hong Kong or 2) changing the structure of the company's relationship with Western listings or regulators will not alter much of anything.

  • As we have stated before, the decoupling of China from the global economy will continue and perhaps quicken as it tries to ring fence and control its newest and most advanced companies and their data.

  • The campaign may be crude and very painful and authoritarian but it isn't necessarily foolish. It might even be strategic.

This raises two follow up questions:

  1. If we are setting ourselves up for a fierce, high stakes and highly competitive era of AI enhanced competition and perhaps even warfare then what are we here in the US doing about it?

  2. What are the West and China doing, if anything, to make sure that we are not only entering a new age of super power rivalry but also one driven by opaque, dangerous and exceedingly complex systems that might make conflict more likely and difficult to resolve?

Watching yet another doleful round of US Congressional interrogation of tech executives this week we couldn't help but be struck by both the scale of the task and clear evidence that we are not approaching our technology industry in the same way.

That may be a good thing over the short term, especially for investors, but over the long term it could prove to be a real weakness for our society, our economy and even our way of life.

It is also a problem without an easy solution.

Putting the above together with this past week's Congressional hearings and it is hard to come away very inspired let alone optimistic.


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