Experts have warned that the frenzy of pouring money into developing artificial intelligence (AI) models has created a potential investment bubble in China. Overinvestment in AI infrastructure poses risks to China’s tech sector. The consequences could lead to layoffs, stock crashes and economic losses.

Robin Li, CEO of Baidu, has drawn a parallel between the dot-com bubble and the AI ​​bubble. He said that only one percent of AI companies survive, while the other 99 percent collapse. “I think, like many other technology waves, a bubble is inevitable. When you get past the initial hype, people will be disappointed that the technology doesn’t live up to the high expectations generated by the initial hype,” he said.

Following the high performance and competitive pricing demonstrated by Chinese AI model DeepSeek, there has been a surge in the number of companies developing advanced models and applications. According to Chinese government data, there were more than 4,500 AI companies by mid-2024.

Alibaba Group Chairman Joe Tsai expressed concern about the funding, regardless of actual demand. “I’m starting to see the beginnings of a bubble. I’m starting to worry when people build data centers on speculation,” he said.

The AI ​​sector has grown at an annual growth rate of more than 10 percent so far. However, it is expected to grow by 47.1 percent between 2025 and 2030. China International Capital Corporation estimates a massive investment of US$1.4 trillion in the AI ​​sector by 2030.

Amid a tariff war with the United States, China has created an AI investment fund with an initial capital of US$8.2 billion. After the DeepSeek craze, enthusiasm among Chinese companies to dive into the AI ​​sector is growing. By mid-2024, 1.67 million companies in China were engaged in AI.

The Chinese people are excited that domestic companies can create better AI models than those in the United States. The Communist Party-controlled government is using this AI enthusiasm to boost national morale, which has been dampened by an economic slowdown, rising unemployment and a property crisis.

Bradford Levy, an AI expert at the University of Chicago’s Booth School of Business, said the government is tapping into China’s renewed optimism. “The Chinese economy is now at a low ebb. By fueling the hype around it, Beijing is generating interest in its own companies,” he said. Beijing has even issued guidelines for using emerging technologies, including artificial intelligence, for jobs.

However, the AI ​​overdrive is expected to have a negative impact on China. People who are not well-versed in AI technology and products will be most affected. “AI has increased the demand for low-skilled workers, and medium-skilled workers are likely to be affected due to substitution effects. While AI applications in China have hurt jobs, AI applications in the United States seem to have a positive impact,” said Zhang Dandan, a young scholar at Peking University.

Although AI has improved workplace efficiency, it has failed to improve job quality for Chinese workers. Nikki Sun, an academic fellow at London-based policy think tank Chatham House, said Chinese workers could be vulnerable to exploitation and risk losing their jobs as they struggle to learn new skills amid the rapid introduction of AI in the workplace.

“The integration of artificial intelligence (AI) into China’s workplace is largely driven by market forces and competition, favoring business interests over the needs of employees,” Sun said. “AI solutions are designed to maximize labor extraction, both paid and unpaid, often leading to poor working conditions and job insecurity.”

As AI becomes the talk of the town, China has seen tech stocks spiral upward. China’s stock market has added more than US$1 trillion as hopes for AI have been rekindled. “Share prices have been outperforming earnings. Any new upside will depend on new catalysts, such as sustained earnings growth and tangible monetization of AI,” said Andy Wong, head of investments and ESG at Solomons Group.

However, this enthusiasm alone will not be enough. The momentum will be lost unless strong core AI business improvements and viable returns are ensured. As access to advanced semiconductors remains a significant barrier, if Chinese AI companies fail to monetize, there could be a major downturn in Chinese markets, which could impact the country’s economy.