The American AI splurge looks especially profligate compared with Chinese parsimony. In 2026 China’s technology titans are forecast to invest less than a tenth as much in data centres as their American counterparts (see chart). All this frugality notwithstanding, their AI models currently appear only fractionally less powerful. K3, an advanced model launched last month by Moonshot AI, a Beijing-based startup, is 95% as clever (on widely used benchmarks) as Fable 5, a frontier model from Anthropic, another top American lab. On August 3rd Alibaba, China’s answer to Amazon, released a model which reportedly scored among the world’s best by some measures. The cost of land (for data centres), some equipment (to fill these with AI servers) and labour (from construction workers to AI whizz-kids) is lower in China than in America. Chinese firms are also accused of training their models using the outputs of expensive American ones. Such “distillation”, as the process is known, lets China’s AI developers free-ride on some of the American spending. Moreover, a portion of Chinese AI bill may not be captured in the headline capital-expenditure figures. Part of the sums that Chinese AI firms, especially smaller ones, might have spent on Nvidia’s best chips may instead have gone towards squeezing better results from inferior semiconductors. DeepSeek, which gave American AI darlings and investors a jump scare by

launching a surprisingly powerful and efficient model in early 2025, is probably ploughing a fair bit into its techniques that reduce demand for computing power. Yet such factors alone cannot explain why China is investing so much less than America for what seem to be comparable AI results. So what does? One obvious answer for lower investments would be a shortage of capital. Chinese firms are, though, flush with it. The bigger check on companies’ AI outlays has been a dearth of things on which to spend money. American restrictions on technology exports to China mean that Chinese firms cannot buy the best—and priciest—AI chips, which are designed by Nvidia, an American firm, and manufactured by TSMC, a Taiwanese contract manufacturer (or foundry) with close links to America. Unofficially, regulators in Beijing have gone so far as to discourage the use of even second-rate Nvidia chips, which Chinese companies can continue to procure for now. At times they have blocked the import of these, in order both to sanction-proof China’s AI infrastructure and to promote homemade alternatives. Consider Alibaba. Last year it said that it would invest $53bn in AI between 2026 and 2028. The planned spending is chump change relative to that of Amazon or Alphabet. Even so, it may be out of reach. Alibaba, which boasts one of China’s most advanced chip-design programmes, used to outsource manufacturing to TSMC. American sanctions have forced it to find domestic suppliers instead. The only Chinese purveyors capable of producing comparably powerful chips are Huawei, a technology behemoth blacklisted by America since 2019, and SMIC, a state-controlled foundry, which manufactures Huawei’s designs. However, American restrictions extend to sophisticated chipmaking gear, forcing Huawei and SMIC to come up with costly workarounds that limit how many sufficiently powerful chips the duo can churn out. Moreover, SMIC cannot offset this inefficiency by ramping up capital spending because the same sanctions also constrain how much less sophisticated chipmaking kit it can get its hands on.

American sanctions are not the only thing that limits Chinese AI capital spending. So does Chinese demand for AI services. Chinese businesses are notoriously stingy with their IT budgets, which are collectively less than one-tenth what American firms spend on software despite Chinese GDP being two-thirds of America’s (and a third bigger when adjusted for purchasing power). This penny-pinching is likely to reduce returns to AI firms’ investment—and thus their willingness to invest in the first place. Moreover, the Communist Party’s AI ambitions are more about diffusing the technology through the economy than creating ever cleverer systems that require ever more powerful semiconductors in ever more data centres. Dozens of American AI companies are thought to be trying to develop artificial general intelligence, which could outdo humans in most intellectual tasks. In China, by contrast, fewer than ten companies are known to be working on such AGI, notes Xu Qi, the head of the Communist Party committee at the Shanghai AI Association. Another signal to keep AI spending in check comes from investors familiar with all these constraints. Chinese ones have long been as wary of overspending on AI as those in America are apparently now becoming. Whereas America’s tech giants had until recently been rewarded with higher share prices for aggressive AI-spending plans, Chinese ones were likelier to be punished for AI profligacy. Investors may currently be entertaining the idea that America has too many data centres. But China, for all its admirable restraint, may not have enough to take full advantage of its AI stars’ innovations—or for those stars to cash in. ByteDance, creator of the world’s top-ranked video-making AI (and owner of TikTok), suffers from intense computing bottlenecks that mean some clips take ten hours to process. Certain services from Zhipu AI, another Beijing lab, and Alibaba’s cloud-computing unit have to be strictly metered and sell out in minutes. K3 has a long waiting list of hopeful users. Diffusion of practical AI is less hungry for computing power than the quest for superintelligence. An overly restrictive diet can still stunt growth. ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/08/03/how-china-gets-better- bang-for-its-buck-than-america-in-ai

Finance & economics | King kwacha African countries are souring on the dollar The yuan and local currencies stand to benefit Aug 6th 2026 ON CAIRO ROAD, a bustling commercial strip in Lusaka, Zambia’s capital, traders and shoppers once haggled over gadgets, furniture and other goods priced in dollars. For decades the greenback was similarly entrenched across the Zambian economy. From car purchases to business contracts, large transactions were routinely settled in the American currency. Interest rate decisions made by the Federal Reserve in Washington rippled through to the price of Zambian groceries and rents. When Zambia defaulted on its debt in 2020, the dollar’s strength at the time exacerbated the fallout. The southern-African country is now trying to wean itself from the greenback. Last October Zambia became the first country on the continent to accept mining royalties and taxes in yuan. This eases capital flows between

Zambia and China, the biggest buyer of Zambia’s abundant copper and its biggest creditor. It also reduces Zambian exposure to the dollar. What is more, since December the Bank of Zambia has required domestic transactions to be paid in local currency, boosting demand for the kwacha. Offenders face fines, up to two years in prison or both. Zambia is illustrative of Africa in general. The dollar still dominates, with some 70% of the continent’s external public debt and many cross-border transactions still denominated in the currency. But countries are incrementally adopting alternatives to “king dollar”. One beneficiary is the yuan. Egypt, Nigeria and South Africa, three of Africa’s biggest economies, have agreed new currency swaps with China as the share of trade settled in yuan expands. Kenya has converted dollar- denominated loans into yuan, potentially saving up to $215m a year in interest costs, equivalent to nearly a fifth of its debt-service payments to China in 2025. Around two-thirds of the country’s outstanding debt to China is now denominated in yuan. Ethiopia and Mozambique are negotiating similar arrangements. Several banks are building infrastructure to support yuan transactions. Last September Standard Bank, Africa’s largest lender by assets (which is part- owned by the Industrial and Commercial Bank of China, a giant state-owned lender), became the first to clear transactions through China’s Cross-Border Interbank Payment System. This has allowed businesses to settle payments directly in yuan. Absa, one of South Africa’s largest banks, and Ecobank, whose reach spans over 30 African countries, are also looking to facilitate direct payments in yuan. Although the number of cross-border transactions in yuan remains small relative to those in dollars, it rose more than fourfold between 2020 and 2024 (the latest year for which official data are available). Yet African governments do not want merely to swap reliance on one foreign currency with dependence on another. They are therefore also ramping up efforts to promote their own monies both at home, as with Zambia’s directives, and in cross-border trade. In 2022 the African Export- Import Bank, a trade-finance institution, and the African Union launched the

Pan-African Payment and Settlement System. The platform allows banks to settle intra-African trade in local currencies. More than 160 commercial banks and 22 central banks have signed up, which could in time save businesses perhaps $5bn in annual banking and foreign-exchange costs. Despite such apparent benefits, the adjustment for African businesses that have long relied on dollars could be painful, says Jibran Qureishi of Standard Bank. In Zambia, the kwacha-only policy has already sent companies scrambling to rewrite dollar-denominated contracts or renegotiate supplier arrangements. Many are nursing losses on legacy contracts. Exporters earning revenues in dollars now face the cost of constantly moving between currencies, which they may start passing on to customers. Plenty of domestic industries, such as construction and agriculture, import fuel and equipment. They are also suddenly on the hook for recurring currency transaction fees, now that they are being starved of dollars from local operations with which to buy imports. At least the importers’ kwachas go further. After a stellar 2025 the currency has strengthened by around 15% against the dollar this year (see chart). Investors piled into kwacha-denominated government bonds after Zambia raised the cap on the share of annual issuance non-residents can buy from 5% to 23%—another way the government is promoting the currency (and

making it easier to roll over its debt). King dollar wields vast global power. But local currencies like the kwacha might yet become stronger local potentates. ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/08/06/african-countries-are- souring-on-the-dollar