The current AI-driven market rally assumes Western dominance. However, China is building a competitive, parallel AI stack with comparable Huawei chips and advanced models. This ecosystem represents a significant, underappreciated risk to the "total addressable market" assumptions propping up Western tech valuations.

Dismissing AI's current capabilities is a mistake due to its exponential improvement rate, evidenced by rapid advances in video generation. Markets selling off established companies based on nascent AI competitors are rationally pricing in this non-linear progress, rather than overreacting.

Market reactions to new AI models diverge sharply between the US and China. In the US, releases from giants like Anthropic or Gemini cause widespread software sell-offs due to disruption fears. In China, new models lift related sectors, as the market sees them as enablers for a less mature software industry with less to lose.

Unlike the largely closed-source US market, DeepSeek's open-source models spurred intense competition among Chinese tech giants and startups to release their own open offerings. This has made Chinese open-source models the most used globally by token count, creating a distinct competitive dynamic.

China is predicted to flood the market with low-cost, high-performance open-weight AI models. This competitive pressure will challenge the dominance and rich valuations of US AI giants like OpenAI, leading to a significant downturn in their related stocks.

The emergence of high-quality, open-source AI models from China (like Kimi and DeepSeek) has shifted the conversation in Washington D.C. It reframes AI development from a domestic regulatory risk to a geopolitical foot race, reducing the appetite for restrictive legislation that could cede leadership to China.

The initial fear around DeepSeq was about China surpassing US AI capabilities. The lasting, more subtle impact is that it broke a psychological barrier, making it commonplace for American developers and companies to adopt and build upon powerful open-source models originating from China.

China's strategy of open-sourcing near-frontier AI models is a calculated move to create pricing pressure and market disruption for Western AI companies. This benefits China's global standing by creating disturbances, as seen with the DeepSeek model release. Considering export controls marks a potential pivot from this disruptive strategy.

According to DeepMind CEO Demis Hassabis, while Chinese AI models are rapidly closing the capability gap with US counterparts, they have yet to demonstrate the ability to create truly novel breakthroughs, like a new transformer architecture. Their strength lies in catching up to the frontier, not pushing beyond it.