China is throwing a 1-2-3 punch at the global AI trade

China is a latecomer, but it has conquered the global car industry with electric vehicles and green tech with solar panels and energy-storage batteries. Why should the outcome be any different with the AI supply chain? This is the question global investors must ask themselves.

In quick succession, China has thrown a powerful 1-2-3 punch at the global AI trade. On July 16, Beijing-based startup Moonshot AI released the Kimi K3 model with performance that rivals top-tier offerings from OpenAI and Anthropic. Then memory chip giant CXMT Corp. was listed in Shanghai on Monday, gaining 466% on the first day after raising $9.8 billion. Last and perhaps most striking, China has reportedly begun mass production of immersion deep ultraviolet, or DUV, lithography tools, the biggest stranglehold that the West has over the country’s AI ambition.

The global chip selloff has been brutal. The Philadelphia Semiconductor Index is in bear territory, while South Korea’s chip-heavy Kospi Index has lost a third of value from late June. Credit markets are also feeling skittish, questioning the soundness of trillion-dollar AI investments and circular financing led by Nvidia Corp.

Investors are right to be nervous. In just two weeks, China has broken through the three strongest fortresses the US has built around AI. It has proven competitive with frontier models, shown that its stock market is deep enough to meet financing demands from the capital-intensive chipmaking industry, and that export controls don’t work. Since 2019, the US has barred Dutch toolmaker ASML Holding NV from selling extreme-ultraviolet, or EUV, lithography machines to China. In the foreseeable future, China Inc. might just make their own tools instead. Both EUV and DUV machines are essential for printing circuit patterns onto silicon wafers, with the former used primarily to produce the most cutting-edge chips.

These developments puncture the belief that the semiconductor supply chain has plenty of economic moats. As an example, it’s not hard to see how China directly impacts Samsung Electronics Co., SK Hynix Inc. and Micron Technology Inc. Already, the number of players in the global dynamic random-access memory, or DRAM, market, has risen from three to four, with CXMT doubling its market share to 8% over the last year. Now, CXMT not only has $10 billion cash to expand capacity, but may get to migrate to next-generation processes faster. Lack of access to lithography tools has been a key constraint.

The speed of China’s breakthrough is also raising concerns that Western suppliers have been too complacent. A Shanghai-based toolmaker, which hasn’t been identified, plans to make about five DUV machines this year, followed by roughly 20 in 2027, according to The Information, which broke the news on China’s secretive lithography program.

By comparison, ASML’s delivery schedule feels painfully slow, making it the primary bottleneck preventing rapid AI-infrastructure development. It takes more than a year to deliver EUV machines, and the period between the company starting production in its own clean rooms and shipping — known as cycle time — was about 22 weeks a few quarters ago. ASML said that it was looking to bring that down to 15 to 16 weeks.

And how about financing channels? The US IPO market may be cooling as investors ask how much global AI demand there really is, especially with the arrival of low-cost, open-source Chinese models. By comparison, China’s stock market is still open for new listings.

Granted, Chinese models and chips are not at par with those in the West, and their suppliers aren’t as profitable. But does that even matter? Even if China isn’t winning the AI race, it’s disruptive enough to deal a fatal blow to the global AI stock rally. Investors can still try to pick up oversold companies, but they should always bear in mind that one day, China can just spring out of nowhere again with the next big tech development.