Chinese open-source AI is wreaking havoc on Western stock markets

China's open-source AI model named Deepseek has dramatically reshaped the AI industry - and only 10 days have passed since it's public release. This technological leap not only undercut Western AI giants but also sent shockwaves through financial markets, particularly affecting companies like computing giant Nvidia. The launch of Deepseek, which significantly lowered the costs of AI computation, triggered the largest single-day loss in stock market history, with Nvidia’s market capitalisation plummeting by $600 billion.

Deepseek’s primary breakthrough was its ability to run efficiently on significantly less hardware, reducing the need for expensive data centers—a core assumption underpinning Western AI development strategies. As an article by the Unherd publication puts it, AI had been seen as one of the last remaining domains where the West, particularly the United States, held a decisive lead over China. The US had previously imposed export restrictions on advanced semiconductors and GPUs, aiming to stifle China’s AI progress. However, instead of crippling China’s efforts, these restrictions spurred innovation like the latest release. 

The West’s narrative of China as a technological follower rather than an innovator had been central to its strategic thinking. The article suggests that many believed that China, lacking creativity, could copy but not create. Deepseek’s innovation debunked this myth and while it may have leveraged aspects of existing AI models, its ability to slash computational costs represents a paradigm shift that threatens the Western AI economic model.

For President Trump, entering his second term, Deepseek’s launch comes at a critical moment. He has closely aligned himself with Silicon Valley billionaires, believing AI could drive America’s economic future. As the article recalls, his administration had recently backed a $500 billion AI infrastructure investment program called Stargate, intended to cement American AI supremacy. However, Deepseek’s efficiency threatens to render such investments obsolete.

The economic stakes extend beyond AI. A significant portion of the US stock market's value is concentrated in a handful of tech firms, collectively known as the "Magnificent Seven." Nvidia alone had been valued at over half of the entire Shanghai stock exchange, despite employing fewer than 30,000 people. Unlike industrial giants like Russia’s Gazprom, which employs hundreds of thousands, Nvidia’s valuation was largely based on future expectations rather than tangible assets.

The article believes that Trump's challenge lies in the fact that the US economy has been increasingly reliant on financial speculation rather than industrial investment. Stock buybacks, rather than reinvestment in production or job creation, have fueled market growth, with buybacks reaching $1 trillion annually by 2018. The AI-driven stock market boom had been central to Trump’s economic vision. Now, with Deepseek undermining its foundation, the author believes that the risk of a massive market correction looms large.

A Systemic Crisis Beyond AI

The Deepseek disruption is not merely about AI—it reveals deeper economic vulnerabilities within the US The pattern of underestimating China’s capabilities has led to repeated failures in US policy, from attempts to cripple Huawei to semiconductor restrictions that ultimately spurred China’s domestic chip industry.

If the AI bubble collapses under Trump’s watch, the article warns of catastrophic political and economic consequences. Like Herbert Hoover during the Great Depression, Trump could find himself presiding over a financial meltdown triggered by misplaced economic bets. The question is not if the bubble will burst, but when—and how severe the fallout will be.

By Nazrin Sadigova