The world’s two largest economies are locked in a fierce competition to win the global AI race.

It’s a competition for military dominance, global power and who ultimately will shape the most “consequential technology” of the 21st century, spanning the full tech stack, cybersecurity, semiconductor leadership and data center build-out. 

"The AI race is no longer just a competition between companies and startups," Kyle Chan, a fellow at the John L. Thornton China Center at the Brookings Institution, said on July 30 on the Beijing Brief podcast. "It’s a contest between nations over global power and influence." 

That competition crystallized with the release of China’s Moonshot AI’s Kimi K3 in mid-July. The announcement contributed to a roughly 1.4% drop in the Nasdaq on July 17 as investors sold off chipmaker stocks. 

Nvidia Corp. (NASDAQ:NVDA) shares fell more than 2%, briefly pushing its market value below Apple Inc.‘s (NASDAQ:AAPL). Advanced Micro Devices Inc. (NASDAQ:AMD) and Broadcom Inc. (NASDAQ:AVGO) also declined. 

U.S. Officials Respond

White House Office of Science and Technology Policy Director Michael Kratsios accused Moonshot of stealing U.S. technology. “We have information that Moonshot AI distilled Anthropic’s Fable for the development of its K3 model,” he said on X on July 22. 

"The U.S. strongly supports the free and fair development of AI," he said. "However, large-scale, covert industrial distillation aimed at stealing proprietary U.S. technology and undermining American research is unacceptable." 

Treasury Secretary Scott Bessent said the U.S. could sanction Chinese firms over such conduct. 

Chinese officials pushed back against the allegations. Liu Chang, a spokesman for the Chinese embassy in Washington, described the assertions as “utterly unfounded.”

Some AI researchers questioned the accusation on technical grounds. Braden Hancock, a researcher at the Laude Institute, told TechCrunch Fable had only been public for about two weeks before K3 shipped. That is too short for large-scale distillation, he said. 

How Good Is K3?

Behind the political fight over the allegations is a technical one: how good is K3, really?

“Kimi K3 is likely the most capable Chinese model, and the best open-weight model,” Chris McGuire, a senior fellow at the Council on Foreign Relations, said on July 31. “Moonshot claims K3 is comparable in performance to the best models available from U.S. firms, such as Claude Fable.” 

That shows China is not falling further behind in the AI race, McGuire said. Beijing is "exploiting every avenue available to stay around six to eight months behind the U.S.," he added.

But that progress may be less independent than it looks, McGuire said. China is actually becoming more reliant on U.S. technology, not less, to maintain its position, he added.  

Open Source Vs. Closed Source 

K3’s release has ignited a debate in Washington and Silicon Valley over open source models. Chinese AI companies like Kimi, DeepSeek, and z.ai dominate that space.  

"The AI race is shaping up to be more than just about bigger and better models," Chan said. "It’s a battle over access, open versus closed models, the U.S. versus China, and of course, who will gain the most from this transformative new technology."

If the U.S. loses its edge, officials worry China could gain “a key advantage in areas like cyber capabilities,” he added.  "This matters more than ever because AI models are getting increasingly powerful. We’re seeing a growing backlash to the data center buildup across the U.S."

That buildup is the physical backbone of America’s AI edge. Public resistance could slow the very infrastructure Washington needs to outpace China. 

Data Center Opposition

A Gallup poll found seven in 10 Americans oppose an AI data center in their local area. 

Separate polling from Emerson College found opposition nationally jumped from 42% to 63% in eight months. 

"The data center buildout is accelerating, and public opinion will shape permitting, regulation, and legislation at every level of government," researchers at Rainey Center said in May. "The industry and its allies have a narrow window to define the debate before opposition hardens." 

The contrast with China is stark. The Chinese public is roughly twice as optimistic about AI’s benefits as their American counterparts, according to Stanford’s Institute on Human-Centered AI. 

AI is diffusing into daily life in China more quickly than in the United States, the National Bureau of Asian Research said in September 2025.

Hyperscaler Spending Expands

None of that skepticism has slowed capital expenditure. 

Hyperscaler capital spending is expected to rise from 1.4% of U.S. gross domestic product in 2025 to 3.1% in 2027, according to consensus data compiled by Apollo chief economist Torsten Sløk. The increase — 0.85 percentage points annually — is roughly twice the pace of the U.S. housing boom at its peak. 

“It’s a big build,” JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon said Wednesday on CNBC. “Hopefully there’ll be more productivity after they’re built,” he said. 

That spending is central to Washington’s bet that the U.S. can out-build China’s AI infrastructure — even as scrutiny over the cost mounts. 

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