The High-Tech Distraction: Xi’s China and the Price of Priorities

The Sino-American rivalry in artificial intelligence has reached new heights following Chinese President Xi Jinping’s state visit to Washington this week. Assessments like “China Is AI-Maxxing” and “The U.S. Lead Over China in AI Is All But Gone” now circulate freely, often accompanied by optimistic predictions about the transformative power of AI on China’s economy.

However, beneath this high-tech façade lies a dire economic reality: China is in its worst shape in decades. The country’s youth unemployment rate has reached 18.9 percent, domestic car sales have plummeted 20 percent from last year, and housing sales have declined another 14 percent. This deflationary spiral has been exacerbated by the government’s overinvestment in AI, with estimates suggesting that state-initiated investment funds deployed around $US184 billion into AI firms between 2000 and 2023.

Economists like Li Daokui, a former adviser to China’s central bank, have warned of the dangers of pouring too many resources into a technology that creates relatively few jobs while doing too little to save the broader economy. However, these voices have been met with indifference from the leadership, who seem more interested in showcasing their technological prowess than addressing the underlying economic issues.

The Chinese government’s response to its economic woes is a classic example of “substitution,” where an injection of high-tech investment replaces more traditional forms of stimulus. President Xi has championed this approach, believing that state-led technological rollouts will modernize traditional industries and unlock future economic value. However, this strategy relies on the assumption that gains from AI investment will materialize in the near future – a prospect that is far from certain.

China’s overreliance on high-tech investment serves as a stark reminder of its limited fiscal flexibility. As economist Xu Chenggang pointed out, every yuan spent on state-backed technology is a yuan not spent on employment and consumption. In a crisis similar to China’s, most governments would use stimulus to create jobs, which in turn would boost consumer spending and create a positive economic feedback loop. Instead, Beijing seems content with pouring resources into AI, even if it means sacrificing its people’s well-being.

The timing of these developments is also noteworthy. Just before the regular midyear meeting of China’s ruling Politburo, establishment economists like Li Daokui were warning about the dangers of an AI-centred allocation of resources. The leadership’s response was a mixture of incremental stimulus policies and vague promises to develop an “intelligent new economy.” The lack of specific targets or concrete measures is telling, as it suggests that Beijing is more interested in appearances than actual progress.

As President Xi has said, what matters most is China’s growing “hard power” and development of advanced industries. However, this approach neglects the fundamental issue at hand: creating jobs and boosting consumer spending. The AI rivalry between the US and China will continue to dominate headlines, but beneath this hype lies a more pressing concern – the price of prioritizing high-tech investment over human well-being.

As China’s economy teeters on the brink of disaster, it remains to be seen whether President Xi and his team will learn from their mistakes or continue down the path of high-tech hubris. The world watches with bated breath as Beijing calibrates its economic policy. Will they choose to prioritize jobs and consumer spending over AI investment? Or will they double down on their high-tech strategy, sacrificing the livelihoods of ordinary Chinese citizens in the process? One thing is certain: China cannot afford to sit out the AI race, but it must do so with a clear-eyed understanding of its own economic limitations.