In the fast-evolving world of artificial intelligence (AI), China is positioning itself at the forefront with groundbreaking technological advancements that promise to reshape both the local and global AI landscapeOne such advancement is DeepSeek, a new AI technology that has garnered significant attention for its potential to revolutionize several industries, from computing to autonomous drivingAccording to recent insights provided by CITIC Securities, DeepSeek is set to be a game-changer in AI applications within China, offering a low-cost, open-source solution that can drive substantial growth in edge AI technologies and mainstream AI solutions.

DeepSeek, with its combination of advanced reasoning capabilities and cost-effectiveness, is drawing comparisons to Chat GPT's explosive rise in the United StatesBoth technologies have the ability to democratize AI access and make its applications more widely available across different sectorsWhile Chat GPT has reshaped how people interact with AI, DeepSeek is poised to do the same in China, with its distinctive ability to overcome barriers like power supply restrictions that have traditionally hindered AI developmentThese restrictions, especially in the context of international trade and geopolitical tensions, have made it difficult for Chinese companies to access the necessary computing power from global providersHowever, DeepSeek’s innovation in training methodologies is helping to circumvent these obstacles, allowing for more efficient and cost-effective AI solutions.

The report by CITIC Securities draws on the analogy of past technological revolutions to underscore the potential of DeepSeekMuch like the mobile phone and electric vehicle industries, which saw a surge in initial investment from overseas trends before cascading into robust domestic markets, DeepSeek is expected to trigger a similar cycle in ChinaIn this case, the surge in AI investment in China is poised to create a virtuous cycle, where greater investment in AI technologies leads to better products, increased profits, and more capital flowing into the AI ecosystem.

So far, the impact of DeepSeek has been most evident in the Technology, Media, and Telecommunications (TMT) sector, where significant performance improvements are already being recorded

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The AI technology’s integration into cloud services, robotics, electronics, and other industries has already started to reshape the economic fabric of China’s tech landscapeFor investors, the question now is how best to navigate this evolving landscapeTo answer this, CITIC Securities recommends taking a strategic approach by closely monitoring the growth of user traffic associated with DeepSeek-powered applicationsHistorical data, especially from the viral success of platforms like Kimi and Doubao, provides useful context for understanding how rapidly emerging technologies can impact market trends and investor behavior.

The trajectory of Chat GPT in the U.S. offers a useful case studyThe meteoric rise in its user traffic, followed by a sharp plateau in growth by mid-2023, resulted in significant corrections in the broader tech sectorThese market corrections were amplified by high trading volumes in the TMT sector, which is often characterized by high volatility during periods of market overheatingA similar dynamic was observed earlier in 2024 with Kimi, where explosive user traffic was seen as a precursor to broader media sector growth, only for the market to adjust once the initial enthusiasm wanedInvestors, therefore, are advised to remain cautious and monitor key metrics, such as user traffic and engagement, to gauge whether DeepSeek’s adoption will follow a similar trajectory.

Should DeepSeek’s user traffic continue to rise and translate into tangible performance across AI-powered applications, the consequences for the Chinese market could be profoundIn this scenario, China could see a significant uptick in AI investments, with companies across various sectors reaping the rewards of greater automation, data processing, and decision-making capabilities enabled by DeepSeek’s AI architectureThis would parallel the growth phases observed in other technology-driven sectors, such as smartphones and electric vehicles, where foreign technological innovations spurred domestic investments that fueled further growth.

The domestic AI market in China has, until now, been somewhat sluggish compared to its international counterparts

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While Chinese AI stocks have rallied, performance metrics have often failed to meet investor expectations, leading to limited returns for many stakeholdersHowever, as DeepSeek and similar technologies gain traction, Chinese companies are likely to see more tangible results from their AI investments, signaling the start of a new phase of AI growthThese companies are already optimizing their products and services, enhancing user experiences, and improving revenue streams, thus setting the stage for a more sustainable and profitable AI ecosystem.

For instance, some domestic computing power providers have successfully enhanced their capabilities, addressing growing demand and boosting profitability in the processAs these companies report stronger earnings, it will create a ripple effect, benefitting the broader AI supply chain and sparking further innovation across sectorsThe result is a shift in focus from speculative themes to performance-driven dynamics, which could lead to a transformation in how investors perceive AI companiesThis could ultimately foster the growth of a domestic AI economy that is less reliant on foreign business models and more attuned to local needs and demands.

Despite the positive outlook, the road ahead for AI in China is not without its risksAs CITIC Securities points out, there are several potential obstacles that could hinder the growth of DeepSeek and similar technologiesThese include geopolitical instability, fluctuating stock market conditions, and the possibility of disappointing results from domestic demand support policiesMoreover, unexpected downturns in international markets, particularly in the U.S., could affect investor sentiment globally, creating volatility that may spill over into China’s AI sector.

For investors and businesses alike, it is crucial to stay vigilant and adaptableConstant monitoring of the economic and political landscape, both domestically and abroad, will be essential for making informed decisions in this dynamic environment

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