Liangzhu, a lush suburb of Hangzhou in Zhejiang Province, is quickly transforming into a symbol of China’s AI revolution. Once celebrated for its 5,300-year-old archaeological sites showcasing ancient Chinese civilization, the area is now emerging as a hub for cutting-edge AI startups. Investors from across the country are flocking to meet ambitious founders, engineers, and AI developers.
Just six months ago, the AI startup DeepSeek was virtually unknown. But after launching an open-source language model with a remarkably low training cost, it ignited a surge of interest in China’s AI sector. Its founder, an alumnus of Zhejiang University near Liangzhu, now represents a growing ecosystem aiming to compete with global tech giants.
In recent months, three major Chinese labs unveiled state-of-the-art large language models (LLMs) considered among the best globally. According to local investors, AI technology has surpassed a critical usability threshold, unlocking commercial opportunities. Entrepreneurs like Sam Hu, a Tencent and ride-hailing industry veteran, are launching ventures focused on AI agents for corporate decision-making.
Morgan Stanley projects that China’s AI industry will grow from $3.2 billion in 2024 to $140 billion by 2030. Including infrastructure and component suppliers, the total market could reach $1.4 trillion. A survey by Gartner shows the percentage of mainland Chinese firms using generative AI skyrocketed from 8% in June 2023 to 43% less than a year later.
Previously, Chinese firms prioritized building the most powerful models. Now, the focus is shifting toward applying AI across industries. Companies like Yizhi Intelligence are already deploying AI agents in sectors such as furniture retail, chemicals, and livestreaming for beauty brands.
Yet, challenges remain. According to Accenture, while 46% of Chinese firms have adopted generative AI, only 9% report tangible gains in productivity or profit. Still, the rapid progress of domestic open-source models is closing the gap with U.S. leaders like GPT and Gemini.
China’s central government plays a pivotal role in AI development. President Xi Jinping has repeatedly emphasized mobilizing national resources to lead the AI race. Local authorities have responded enthusiastically—one district in Hangzhou granted a 3-million-yuan ($420,000) subsidy to a smart-glasses startup just 8 minutes after its application.
Government agencies have also become key AI customers. From museum tours using AR glasses to AI tools assisting teachers and analyzing government service data, public sector applications are expanding rapidly. Some provinces are even integrating AI into traditional sectors like rare earths and ceramics.
The rapid growth is not without risks. Analysts at Jefferies warn of a potential “bubble” around humanoid robots, which have gained traction due to national policies promoting “embodied AI.” Despite the hype, real-world returns may take years—if they materialize at all.
AI deployment in healthcare is another concern. A recent Tsinghua University study questioned whether over 300 hospitals using DeepSeek are moving “too fast, too soon,” risking inaccurate diagnoses. Another team called for urgent safeguards to ensure responsible AI use in medical settings.
Despite U.S. export bans on AI chips—such as the temporary ban on Nvidia’s H20 earlier this year—China’s AI sector continues to thrive. At a recent major AI conference in Shanghai, MiniMax CEO Yan Junjie reported that inference costs have dropped significantly, and are expected to fall further amid fierce local competition.
Jiang Xinghua of Yizhi Intelligence noted that although Chinese developers lack access to top-tier foreign models, domestic open-source alternatives are improving rapidly.
President Xi has acknowledged the risks of over-investment, recently questioning whether all provinces need to prioritize AI, computing power, and electric vehicles. The answer, as he stated, is clearly “no.”
Nevertheless, for now, the Chinese government’s robust participation remains a critical force propelling the AI engine forward—with no signs of slowing down.
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