Why DeepSeek disruption is the China risk Wall Street can’t ignore

Ever since China Evergrande Group collapsed in 2021, triggering a full-blown crisis in China’s property sector, Wall Street has been unfazed by the threats emanating from the world’s second-largest economy.

In fact, if the US-China trade war is excluded, the last time China was viewed as the biggest risk in markets was in 2016, when fears of a hard landing for the economy were at the top of investors’ list of concerns, according to the findings of Bank of America’s monthly global fund manager survey.

Yet while investors have brushed off China-specific risks, China lies at the heart of the geopolitical tensions that have been a constant thorn in the side of global asset prices over several years. The pressure point is the booming US technology sector, led by the so-called Magnificent Seven stocks, which drove the gains in equity markets in 2023-24, fuelled by enthusiasm about generative artificial intelligence (AI).

On January 27, the AI-fuelled rally received a severe blow from DeepSeek, a little-known Chinese AI start-up. Its new large language model reportedly performs as well as those of its powerful Silicon-Valley-based competitors with only a fraction of the computing power, thus a fraction of the cost.

Although DeepSeek’s claims need to be verified, the firm’s open-source model – which allows developers to inspect and improve the software – has taken the AI world by storm. Last weekend, the company’s mobile app rose to the top of Apple’s iPhone download charts. Marc Andreesen, a venture capitalist, called DeepSeek’s breakthrough “AI’s Sputnik moment”, in reference to the launch of the Soviet satellite that set off the space race in the late 1950s.

The initial reaction of investors suggested something profound and far-reaching had occurred, calling into question US supremacy in AI and the belief that the future of the technology requires ever-increasing amounts of capital spending on chips and infrastructure.