“SOUTH OF THE Huai river few geese can be seen through the rain and
snow.” In classical Chinese this verse is a breakthrough—not in
literature but in computing power. The line, composed by an artificial
intelligence (AI) language model called Wu Dao 2.0, is
indistinguishable in metre and tone from ancient poetry. The lab that
built the software, the Beijing Academy of Artificial Intelligence
(BAAI), challenges visitors to its website to distinguish between Wu
Dao and flesh-and-blood 8th-century masters. Anecdotal evidence
suggests that it fools most testers.
The system, whose name means “enlightenment” and which can emulate
lowlier types of speech, derives its power from a neural network with
1.75trn variables and other inputs. GPT-3, a similar model built a
year earlier by a team of researchers in San Francisco and deemed
impressive at the time, considered just 175bn parameters. As such Wu
Dao represents a leap in this type of machine learning, which tries to
emulate the workings of the human brain. That delights fans of
classical literature—but not as much as it does the Communist
authorities in Beijing, which have put AI at the heart of China’s
technological and economic master plan first set out in 2017. It
spooks Western governments, which worry about AI’s less benign
applications in areas like surveillance and warfighting. And it
intrigues investors, who spy a huge business opportunity.
On the face of it, the plan is off to a good start. The logistics arm
of JD.com, an e-commerce group, operates one of the world’s most
advanced automated warehouses near Shanghai. In May Baidu, China’s
search giant, launched driverless taxis in Beijing. SenseTime’s
“smart city” AI models—urban surveillance cameras that track
everything from traffic accidents to illegally parked cars—have been
deployed in more than 100 cities in China and overseas. China has been
deploying more AI-assisted industrial robots than any other country.
And in 2020 it surpassed America in terms of journal citations in the
field.
The five most prominent listed Chinese AI specialists are collectively
worth nearly $120bn (see chart 1). The biggest of them, Hikvision, has
a market value of $60bn. SenseTime, which went public in Hong Kong on
December 30th, is worth $28bn. Two more are expected to list soon. In
2020 investments in unlisted AI startups reached $10bn, according to
the AI Index compiled by researchers at Stanford University. In its
prospectus SenseTime forecasts that revenues from AI-assisted
image-recognition and computer-vision software, the most mature part
of the market, could hit 100bn yuan ($16bn) by 2025, up from 24bn yuan
in 2021 (see chart 2).
Look beyond the headlines or Wu Dao’s elegant verses, however, and
things look more complicated. Yes, China has made progress on AI, and
even the occasional big splash like Wu Dao. But it almost certainly
still lags behind America in terms of both investment and cutting-edge
innovation. In 2020, three years into the master plan, privately held
Chinese AI firms received less than half as much investment as their
American counterparts. And a lot of the public and private money
pouring into the sector may end up being wasted.
China’s five-year-old AI master plan set out a number of goals. For
example, by 2025 the country is to create an industry with global
revenues of 400bn yuan, achieve “major breakthroughs” in
technology and lead the world in some applications. Five years later
it is to dominate the industry (by then worth $1trn in sales), having
written its ethical code and set its technical standards, just as
Europe and America defined the contours of the Industrial Revolution.
Elements of the Communist Party’s approach are characteristically
prescriptive. The Ministry of Science and Technology has instructed
China’s tech giants with existing ventures in certain subdisciplines
of AI—Tencent in medical image recognition, Baidu in autonomous
driving—to double down on these. That said, the plan is less
hands-on than some of the country’s other development projects,
observes Jay Huang of Bernstein, an investment firm. In the words of
Huw Roberts of Oxford University and five co-authors, the blueprint
acts chiefly as a “seal of approval” which “derisks” assorted
AI initiatives championed by central-government entities, local
authorities and the private sector.
In practice, the derisking involves doling out lots of public money.
Some of this takes the form of tax breaks and subsidies, as in the
“little giants” programme to nurture 10,000 promising startups
across various sectors, including AI. Local governments, even in poor
rustbelt provinces such as Liaoning in the far north-east, have also
dangled similar incentives in front of AI-curious companies.
Another type of support comes from government procurement. Firms do
not disclose how much revenue they derive from public-sector
contracts. But the share is likely to be significant. Central and
local authorities use SenseTime’s surveillance technology. Megvii,
which also specialises in image recognition, has extensive dealings
with state-owned enterprises.
The state is also investing in AI companies directly. The central
government runs several tech-investment vehicles. Local governments
are increasingly creating their own, often armed with billions of
dollars. Tianjin, a coastal metropolis, announced a $16bn AI fund in
2018.
Government capital is increasingly helping plug a gap left by foreign
investors scared away by American sanctions against some of China’s
AI darlings, which are seen as being too close to the Communist Party.
A fund run by the Cyberspace Administration of China, a regulator, has
acquired an undisclosed stake in SenseTime, which last month was hit
by another round of American sanctions over its alleged involvement in
government repression of the Uyghur ethnic minority. (SenseTime says
that the sanctions are based on a “misperception” of its
business.) A separate vehicle, the Mixed-Ownership Reform Fund,
accounted for $200m of the $765m that the firm raised in its initial
public offering (IPO). Local governments chipped in another $220m.
LOST IN TRANSLATION
State dosh, combined with access to plentiful public data, has helped
turn Chinese AI firms into powerhouses in certain niches. According to
Bain, a consultancy, by last June the cloud division of Alibaba,
China’s e-commerce behemoth, was offering 62 AI-enabled services,
from voice recognition to video analytics, compared with 47 from its
closest Western rival, Microsoft. SenseTime and Megvii mass-produce
computer-vision software and hardware that can be adapted to and
installed in individual factories. Despite being locked out of most
Western markets by the American sanctions, SenseTime raked in 762m
yuan in overseas revenues in 2020, compared with 319m yuan two years
earlier, mostly from South-East Asia.
For all these successes, though, China’s AI industry trails the West
in important ways. Despite leading America in the overall number of
AI-related publications, China produces fewer peer-reviewed papers
that have academic and corporate co-authors or are presented at
conferences, both of which are typically held to a higher standard. It
ranks below India, and well below America, in the number of skilled AI
coders relative to its population. These shortcomings are likely to
persist, for three reasons.
First, capital may not be being allocated efficiently. It is unclear,
for example, how much of Tianjin’s $16bn kitty has actually been
deployed. More damaging, Beijing has created a system for rewarding
local officials that favours debt-fuelled spending and seldom punishes
wastefulness.
Many state AI investments have been “reckless and redundant”, says
Jeffrey Ding of Stanford University. Zeng Jinghan of Lancaster
University has documented the rise of firms that falsely claim to be
developing AI in order to suck up subsidies. One analysis by Deloitte,
a consultancy, estimated that 99% of self-styled AI startups in 2018
were fake. Such boondoggles not only burn through public cash, Mr Ding
notes, but also consume scarce human capital that could more usefully
have been deployed elsewhere.
China’s second problem is its inability to recruit the world’s
best AI minds, especially those working on high-level research. A
study in 2020 by MacroPolo, a Chicago-based think-tank, showed that
more than half of top-tier researchers in the field were working
outside their home countries. America and Europe look more appealing
to such footloose brainboxes, including many Chinese ones. Though
about a third of the world’s top AI talent is from China, only a
tenth actually works there. A shortage of non-Chinese researchers
further handicaps China’s capabilities, notes Matt Sheehan of the
Carnegie Endowment for International Peace, a think-tank in
Washington.
Even more problematic for the party, its master plan ignored the
cutting-edge semiconductors that power AI. Since its publication
Chinese companies have found it ever more difficult to get their hands
on advanced computer chips. That is because virtually all such
microprocessors are either American or made with American equipment.
As such, they are subject to restrictions on exports to China put in
place by Donald Trump and extended by his successor as president, Joe
Biden. It will take years for Chinese companies to catch up with the
global cutting-edge, if they can do it at all.
These challenges will continue to bedevil all of China’s high-tech
industries for years to come. It could leave its AI businesses stuck
in a rut—successfully rolling out relatively unsophisticated
products while trailing Europe and America in paradigm-shifting
developments of greater financial and strategic value. Consider Wu Dao
2.0. Although it was a huge improvement on GPT-3, it did just
that—improve an existing technology rather than break new ground. No
amount of Chinese taxpayers’ money is likely to change that. ■