DeepSeek was virtually unknown when the year began. It is now shaking global sharemarkets and being called a “Sputnik moment” for the US. Last month, Xiaohongshu (Little Red Book) also rose in popularity, as US TikTok users began migrating en masse to this Chinese social media and e-commerce  site  in anticipation of TikTok  being shut down.

In Hangzhou, the home of Alibaba and DeepSeek, a sense of optimism, excitement and energy is still widespread. Getty Images

After a string of announcements by China’s digital tech giants on new developments in high-end semiconductor chips, the US strategy to contain China through its “small yard, high fence” restrictions on technology transfer is now in disarray.

Far from the tired and unreliable narrative of Chinese economic decline, these developments, together with China’s having emerged as the world leader in electric vehicles and low-emissions transition technologies, point to areas of significant vitality.

The Chinese economy is in the process of massive structural change. The implications of this may only be fully understood in the years to come. China is sloughing off its staple low-value-added assembly manufacturers as it moves rapidly up the value-added chain. This process has accelerated with the geopolitical tensions [https://www.afr.com/policy/foreign-affairs/look-to-ai-not-tiktok-for- trump-s-china-intentions-20250120-p5l5rd] in recent times, as Beijing has sought resilience against unilateral trade and investment measures applied by the United

States.

Structural change on this scale and pace inevitably creates dislocation in labour markets, as some skills become redundant and time is required to acquire new ones. Nevertheless, in 2024, China’s service sector grew almost three times as fast as GDP: an effective way to mop up frictional and structural unemployment.

And contrary to the hackneyed narrative that under Xi Jinping the private sector has been squeezed into irrelevance, all of these major developments in new industries have been led by China’s private entrepreneurs.

At a meeting recently in Beijing with some local venture capitalists, educated or with experience in the US, I was told of a new breed of Chinese private entrepreneur. They are all mainly young – like Liang Wanfeng, the founder of DeepSeek – and use the vast size of China’s domestic market to build rapid economies of scale and critical mass and then move offshore. They were described as having been “born global”.

The current dance between Washington and Beijing over tariffs is a sideshow.

To be sure, China’s economy currently lacks the effervescence of the pre-COVID period. This is attributable mainly to the shakeout in the property market, which has smashed consumer confidence and had a knock-on effect on local government debt. The speculative, debt-fuelled, property development merry-go-round has shuddered to a crawl. Confidence has been further harmed by geopolitical headwinds.

A wander around Beijing’s and Shanghai’s empty shopping malls and half-filled restaurants makes the point. But in other cities, such as Hangzhou, the home of Alibaba and DeepSeek, a different story is told.

China’s economy did manage to grow by 5 per cent in 2024, an annual growth rate nearly twice that of the US and among the highest for all big economies. And despite nearly eight years of US policy to onshore manufacturing, China still accounts for 31 per cent of global manufacturing, double that of the US. China

remains, and will continue to be, the workshop of the world. Moreover, it has done this as it undertakes deep industrial structural change.

In 2024, China’s EV manufacturers accounted for around 60 per cent of units sold and over 66 per cent of batteries. In 2023, China accounted for 77 per cent of the world’s production of solar panels. BYD is a private Chinese company that is the world’s biggest producer of EVs while Tongwei Solar in Chengdu is the biggest manufacturer of solar panels and is also privately owned. The idea that under Xi Jinping China’s private sector and entrepreneurship have been smothered is fanciful.

The emerging characteristics of China’s dynamic private sector are that it is heavily concentrated in technology, especially data-intensive industries; and it is led by youthful entrepreneurs who seek to build scale rapidly, but with ambitions to move quickly to international markets.

They seek market power first before profits. In this respect, the model is not that different to the one pioneered by Jeff Bezos with Amazon. Their philosophy is “power before money”.

“Once you have the market power, you can then start to work out how to make money from the business,” I was told by an investor. This is clearly what Liang Wanfeng is doing with his open-source AI model DeepSeek.

As can be seen, almost daily, China has no shortage of eager venture capitalists and smart young entrepreneurs seeking fame and fortune. Despite the consumer malaise, the sense of optimism, excitement and energy that characterised earlier periods of China’s economic reforms is still widespread.

According to Newsweek, more students graduate in engineering and computer science each year in China than in the rest of the world combined. While that might lead to intense competition in the graduate job market and frequently disappointing expectations, it also means that China’s entrepreneurs have a huge and relatively low-cost talent pool from which to draw.

China is rapidly strengthening its digital technology ecosystem comprising young