AI investment bubble may hurt China’s tech sector, jobs, and economy

The frenzy over pouring money into developing Artificial Intelligence (AI) models has created a potential investment bubble in China, experts have warned. The heavy investment in AI infrastructure poses risks to China’s technology sector. The consequences could lead to layoffs, stock collapses, and economic losses.

Baidu’s Chief Executive, Robin Li, drew a parallel between the dot-com bubble and the AI bubble. He said that only one percent of AI companies would survive, while the other 99 percent would collapse. “I think, like many other technology waves, the bubble is kind of inevitable. When you pass the stage of initial excitement, people will be disappointed that the technology doesn’t meet the high expectations generated through the initial excitement,” he said.

Following the high performance and competitive pricing exhibited by the Chinese AI model, DeepSeek, there has been a surge in the number of companies developing advanced models and applications. According to Chinese government data, there were over 4,500 AI companies by mid-2024.

Alibaba Group Chairman Joe Tsai expressed concerns over fundraising, irrespective of the actual demand. “I start to see the beginning of some kind of bubble. I start to get worried when people are building data centers on speculation,” he said.

The AI sector has grown at an annual growth rate exceeding 10 percent until now. However, it is expected to grow at 47.1 percent between 2025 and 2030. China International Capital Corporation has estimated a whopping USD 1.4 trillion investment in the AI sector by 2030.

Amid the tariff war with the US, China has created an AI investment fund with an initial capital of USD 8.2 billion. In the wake of the DeepSeek frenzy, there is growing excitement among Chinese companies to dive into the AI sector. By mid-2024, a total of 1.67 million companies were involved in AI in China.

People in China are excited that local companies are able to create AI models that are better than those from the US. The Communist Party-ruled government is using this AI hype to elevate the national mood, which has been subdued due to the economic slowdown, growing unemployment, and the property crisis.

Bradford Levy, an AI expert from the University of Chicago Booth School of Business, said the government was tapping into the renewed optimism in China. “The Chinese economy is on shaky ground right now. By fanning the hype around it, Beijing generates interest in their own firms,” he said. Beijing has even issued guidelines directing the adoption of emerging technologies, including artificial intelligence, in employment.

However, the AI overdrive is expected to negatively impact China. People who are not well-versed in AI technology and products would be most affected. “AI has increased the demand for low-skilled workers, while mid-skilled workers are more likely to be affected by substitution effects. AI applications in China have hurt employment, whereas AI applications in the US seem to have a positive effect,” said Zhang Dandan, a young scholar at Peking University.

While AI has enhanced workplace efficiency, it has failed to improve job quality for Chinese workers. Nikki Sun, an Academy Associate at the London-based policy institute Chatham House, said Chinese workers were vulnerable to exploitation and at risk of losing their jobs as they struggle to learn new skills amid the rapid introduction of AI in workplaces. 

“Artificial intelligence (AI) integration in China’s workplaces is largely driven by market forces and competition, favoring business interests over those of workers,” Sun said. “AI solutions tend to be designed for maximizing labor extraction, both paid and unpaid, often leading to worse working conditions and job insecurity.”

China saw the stocks of tech companies spiral upward as AI became the talk of the town. China’s stock market added more than USD 1 trillion as hopes were rekindled over AI. “Share prices have run ahead of earnings. Any renewed upside will likely depend on new catalysts, such as sustained earnings growth and tangible monetization of AI,” said Andy Wong, investment and ESG at Solomons Group.

However, the hype alone will not be enough. The momentum will be lost if robust core AI business improvements and feasible returns are not ensured. A huge fall in Chinese markets could occur, thus impacting the country’s economy, if Chinese AI companies fail to monetize, as access to advanced semiconductors remains a significant obstacle.(Saurabh Katkurwar)