Commentary: How AI is Unlocking Opportunities for Businesses and Investors
The rapid rise of cutting-edge technologies such as DeepSeek has spurred tech giants like Alibaba Group to plan for a substantial increase in artificial intelligence (AI) investment over the next few years, marking a turning point for China’s AI industry.
This shift not only accelerates growth within the AI sector but reshapes the broader economy, influencing supply chains, demand dynamics and pricing structures.
AI’s most significant impact lies in its ability to drive long-term productivity gains and boost economic growth. By automating processes, fostering innovation and supplementing labor in an aging population, AI enhances efficiency and creates new industries while redirecting investment toward high-value sectors.
Research by market analysts and academics underscores AI’s economic impact. Estimates vary slightly, but most studies agree on its positive influence. Based on factors such as labor substitution rates and long-term job creation, we project AI could raise annual potential GDP growth by about 1 percentage point.
In the short term, however, AI’s impact on the economy is more gradual. Development remains concentrated in the R&D and investment phases, with adoption progressing slowly. For example, U.S. Census Bureau data shows that AI technology penetration grew from 3.7% in October 2023 to 5.4% in February 2024, with projections exceeding 7% by 2025.
Yet, this growth is still limited, concentrated in sectors like technology, finance and healthcare. While U.S. tech companies are increasing AI-related capital expenditures (capex), operational returns have yet to fully materialize, tempering immediate economic benefits.
Overall, the AI industry has emerged as a key driver of economic growth, alleviating concerns about long-term stagnation and increasing confidence in the pursuit of high-quality development.
Short-term capital expenditure and GDP driver
How large could China’s AI-related capital expenditure reach by 2025? Huatai Securities provides two estimates:
First, based on AI investment plans, between 600 billion yuan and 1 trillion yuan ($83 billion to $138 billion) could be spent on AI in 2025.
Second, benchmarking against American AI investment levels, annual AI-related capital expenditure in China over the next three years could range between 500 billion and 1 trillion yuan ($59 billion to $138 billion). Even with conservative estimates, AI-related spending in 2025 would contribute more than 0.4 percentage points to GDP.
Two challenges may temper this outlook, however. First, a significant share of AI investments is directed at chips, data centers and algorithm upgrades, with reliance on imported products and equipment, limiting their direct impact on domestic growth. Second, rising AI capital expenditure may crowd out cash flows from traditional businesses, creating resource allocation trade-offs.
Despite these challenges, AI spending is expected to boost consumption and investment confidence, create new economic opportunities and enhance productivity, especially by playing to China’s strengths in engineering talent.
AI’s impacts on corporate profitability
The impact of AI development on corporate profits is structural, with significant differences across AI layers.
The hardware layer, including chips and power infrastructure, benefits more immediately from capital expenditures, while the software layer faces longer R&D cycles and relies on valuation gains for pricing.
Low-cost models such as DeepSeek could be more beneficial to the application layer by reducing infrastructure costs and accelerating technological progress. But they may lower demand expectations for the hardware layer, creating potential disruptions. Technological breakthroughs in this area require close monitoring.
For China, domestic substitution of key hardware components is crucial for growth. China’s strengths in digital infrastructure, data scale and application scenarios mean it should be able to capitalize on the application layer sooner. However, a broader corporate profit recovery will depend on economic cycles, supply-demand improvements and policy adjustments in real estate, fiscal measures and industrial capacity.
Two key risks warrant attention:
First, as seen in the U.S., discussions around “too much capex, too little revenue” reflect concerns over the return on AI investments. For example, despite Meta’s significant investments in AI research and its stockpiling of expensive chips, the company has yet to generate substantial revenue beyond improvements in its advertising business. This underscores the need to monitor the balance between short-term costs and long-term returns in AI investments. Intensifying industry competition and liquidity fluctuations could lead to further market volatility.
Second, there is the risk of potential overcapacity. With AI investment increasing, particularly in China, the sector may face issues of rapid capacity expansion potentially lowering prices and hitting corporate profits. That said, in the short term, the sector is more likely to remain underinvested rather than overexpanded.
Implications for financing needs and price indicators
The current AI investment wave is primarily financed through internal resources or equity markets, with limited reliance on debt. Supported by robust cash flows, leading tech companies favor equity financing, minimizing the impact on the bond market compared with traditional sectors such as real estate.
AI investments may push up prices for critical products such as chips and servers, potentially raising the Producer Price Index and indirectly influencing select Consumer Price Index components. Given their relatively small weight in these indices, however, the direct inflationary impact is likely to be modest.
By enhancing productivity and partially replacing labor, AI could lower production costs and widen labor market gaps. While these effects may not be immediate, they are expected to exert anti-inflationary pressures over the medium to long term.
Over time, AI is set to stimulate demand, generate jobs, and boost growth, and corporate profits.
Market perspective
The technology sector remains a central investment theme, driven by industrial cycles, supportive policies and ample liquidity. Opportunities span computing power, infrastructure, AI applications and the transformation of traditional industries.
AI investments influence the bond market through growth expectations and risk appetite. However, with financing demand unlikely to match that of the property sector and a moderate impact on employment, the overall effect is limited. In the long term, AI’s potential anti-inflationary effects could even benefit the bond market.
Additionally, AI investments may spur demand for infrastructure upgrades, such as power grid modernization, creating opportunities in related commodities. Investors should monitor these sectors for potential gains.
Zhang Jiqiang is the research head of Huatai Securities
This commentary has been edited for length and clarity.
Contact editor Han Wei (weihan@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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