Is China leading the way in artificial intelligence?

Even though China's economy has many drawbacks, investors can still find opportunities

There are challenges for the Chinese economy. Consumer spending is weak, business investment is weak, and the real estate market is still in a slump.

Dale Nicholls, manager of Fidelity's China special situations fund, stated on the most recent episode of BFIA Talks that although there are some negative aspects of the nation's economy, there are also positive aspects to watch out for.

"Things are rather subdued in terms of domestic business. However, there are pockets of strength in some areas as usual."

While there is a "relatively weak consumption market," he added, businesses with the right business model are gaining market share. He cited some of his fund's constituents that are generating good numbers, such as high-end mall operators and certain restaurant chains.

Another fascinating field for the region is artificial intelligence (AI). "There is a bit of a tech boom among the businesses that deal specifically with anything AI-related. The businesses that are engaged in that are doing well," he stated.

The global economy is rapidly expanding in the field of artificial intelligence (AI), and China is experiencing similar controversies. For instance, worries about the return on investment and the amount of capital expenditure.

Nicholls stated: "I think this is a little bit overdone, but the markets reacted negatively to the big tech companies, the Alibabas, the Tencents of the world, increasing capital expenditures."

According to Nicholls, investors who are rejecting higher capital expenditures are failing to consider whether the companies have a track record of generating profits.

He stated, "A lot of these companies have a pretty good track record of generating good returns, and the feedback we get from them on what the return they're getting on their spend is pretty good."

Nicholls was certain that some segments of the Chinese AI market still offer good value. "I would include some of those well-known tech brands in that group. They have been sold off, but if you consider the companies as a wholefor example, cloud computingyou can see that growth is now accelerating, so things are undoubtedly improving."

Is the AI race being won by China?

Chinese models are challenging the US-based models that currently lead the world in artificial intelligence.

"The market doesn't seem to be rewarding China for having some of the most competitive LLMs (large language models) available. The stand-alone LLM companies listed in China, in particular, have performed admirably."

The Western AI market has already been repeatedly upended by Chinese models. When the DeepSeeks R1 model was released in January 2025, investors reacted to Chinese AI challenging Western models, which caused a great deal of panic in the West.

Another Chinese AI model, Kimi K3, caused a similar panic when it was released in July.

"The Kimi K3 is intriguing because, although its size differs significantly from others, its performance is on par with that of global frontier models. It is significantly larger, and the price reflects this as well. In terms of cost, they are clearly far more expensive than the other open weight models that the Chinese have been selling, but they are not quite at the same levels as US models.

Thus, I believe it's another sign of the innovation that's taking place locally."

Watch the entire episode of BFIA Talks with Dale Nicholls in dialog with BFIAs Terry Tanaka on YouTube or listen to it on any podcast platform to learn more.

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A podcast called BFIA Talks can help you discover the keys to financial success. Influential guests, including CEOs, entrepreneurs, economists, and fund managers, join editors Terry Tanaka, Terry Tanaka, and Terry Tanaka to offer their best advice on money management, prudent investing, and accumulating wealth.

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