Last week, Beijing debuted its latest strategy for winning the AI race. China’s powerful State Council laid out an ambitious vision to rapidly diffuse AI into six key areas, ranging from accelerating scientific research and development to improving governance capacity. The plan sets striking, concrete targets that include deploying a range of applications across 90 percent of wide swaths of its economy in just five years. Think pervasive AI assistants embedded in most aspects of life, from manufacturing equipment to municipal services, or smart city infrastructure that can optimize traffic flows and energy usage in real time. 

 China’s latest plan is part of a broader strategic bet. The PRC thinks it can integrate AI throughout its society to turbocharge its economy and secure AI leadership. It’s a playbook the country has used before. During the mid-2010s, China transformed its digital economy by diffusing internet applications throughout what Beijing calls the “real economy.” 

 But this time could be very different. Chinese leadership is confident in its AI development, but—perhaps counterintuitively—investors are not. China’s venture capital ecosystem is dry at this critical moment for AI, and as a result, Beijing’s aspirations are likely to fall short of the whole-of-society economic transformation the party wants. U.S. policymakers should mostly ignore China’s aspirational rhetoric and focus on what it can achieve in practice.  

China’s Proven Playbook: How Internet+ Worked 

China’s current AI adoption approach centers on its AI+ Initiative, which is an allusion to the government’s prior Internet+ goal of pursuing the digital transformation of traditional sectors through technological integration. The AI+ Initiative was launched at the December 2024 Central Economic Work Conference, just before DeepSeek’s rise to global prominence. To date, AI+ has operated mostly as a rallying signal from the central government designed to mobilize resources across the broader Chinese system. The State Council’s newly announced plan offers the most granular formulation of how the central government envisions AI being diffused throughout the economy.  

Those ambitions rest on what China believes is a proven and adaptable emerging technology policy recipe: The government sends a clear demand signal, local government and private capital fill in gaps, many initiatives fail while some succeed, and the economy grows. It’s the same formula that allowed China to massively grow its economy during its internet boom of the mid-2010s. 

During that time, China redirected a preexisting but rapidly growing extensive venture capital ecosystem, which was already creating an average of 238 new funds annually. Private investors clustered in coastal cities and catalyzed investment in the most promising innovations. State-backed funds spread tech investment into China’s interior, ensuring comprehensive geographic coverage. The incentives of China’s tech giants to develop internet applications strongly aligned with the central government’s priority. And policymakers sought to create an optimal regulatory environment, fostering fierce competition between local governments to become AI hubs while protecting the domestic market from Western competition. 

This combination of financial muscle, company-government incentive alignment, and carefully calibrated regulation helped early Chinese AI companies scale. The results were dramatic: Chinese equity funding for AI startups jumped from 11 percent of global investment in 2016 to 48 percent in 2017, surpassing the United States. And the effects boomed throughout the economy and into China’s GDP numbers, which grew by more than 6 percent each year from 2015 through the pandemic. 

Why China’s Tech Diffusion Formula Maps Poorly Onto AI 

 This time, however, the economic dynamics present a daunting challenge. VC funding for Chinese AI startups dropped nearly 50 percent year-over-year in early 2025, reflecting broader investor caution amid sluggish growth, regulatory uncertainties, and geopolitical tensions. In the second quarter alone, funding dropped to just $4.7 billion, its lowest level in a decade. This investor fear has been driven in part by the Chinese government’s demonstrable willingness to crush frontier innovation in the name of doubling down on measures to preserve ideological purity. 

The rest of the Chinese market, while offering some mixed signals, offers further reason for pessimism. The real estate sector has plummeted, its youth unemployment rate exceeds 17 percent, and consumer confidence is declining. The geopolitical situation doesn’t help either, with export controls still hitting the Chinese tech sector, tariffs threatening the broader economy, and ideological control-focused policy measures that scare most investors. 

This funding crunch poses a particular problem for AI deployment. When China rolled out mobile payments and food delivery apps in the mid-2010s, the core technologies already worked. Companies just needed capital to scale user acquisition and build out logistics networks. AI integration is fundamentally different: It requires sustained R&D to work reliably in specific contexts. A hospital can’t just install ChatGPT and call it AI-enabled healthcare—it needs months or years of development to handle medical workflows, regulatory compliance, and integration with existing systems.  

Without patient capital willing to fund these multiyear development cycles, most AI+ projects will stall before they solve the core implementation problems. The timing is particularly bad since China needs sustained investment in AI R&D just when the funding environment has turned risk-averse and short-term focused. While government funding remains a potential alternative to private investment, it will likely be constrained amid slowing growth and mounting local government debt burdens, limiting the state’s ability to fully compensate for the private funding shortfall.

Building AI Policy Based on Reality 

The United States might be tempted to overreact to China’s grandiose economic projections via cutting down on guardrails to safeguard frontier AI development—but it doesn’t need to. China is not an unstoppable force that can diffuse AI at will. Rather than panic based on exaggerated fears of Chinese progress, U.S. policymakers should focus on what China can genuinely deliver. China isn’t about to leap past the United States based on one strategy document. Inflated anxiety about China’s technological capabilities should not dictate the relationships between the U.S. government and its leading tech companies. 

Still, while Washington should treat Beijing’s short-term projections skeptically, the AI competition will ultimately turn on deeper economic fundamentals and sustained policy execution. Here, U.S. policymakers should not repeat past mistakes and underestimate China. U.S. policymakers were flatfooted as China built hard-earned, deep strengths in energy, 5G, and industrial robotics, including embodied AI. The right approach requires seeing China as it actually is—a serious technological competitor facing real constraints—rather than an unstoppable force.