CSET

In & Out of China: Financial Support for AI Development

Ngor Luong

Margarita Konaev

August 10, 2023

Drawing from prior CSET research, this blog post describes different domestic and international initiatives the Chinese government and companies are pursuing to shore up investment in AI and meet China’s strategic objectives, as well as indicators to track their future trajectories.

Introduction

In 2017, the Chinese government released the “New Generation Artificial Intelligence (AI) Development Plan” with the goal to build up indigenous capacity at home and encourage its technology companies to pursue a “going out” strategy, namely, to invest and expand abroad. Over the past three years, the Center for Security and Emerging Technology (CSET) has published a series of studies to better understand and track China’s domestic and international initiatives to financially support the country’s AI development. Below are some of the key takeaways from our research. 

Domestic Support

To realize its AI ambitions, the Chinese government pours billions of RMB into strategic industries such as AI, providing financial and political support for companies at the forefront of technological innovation. Some of these funding mechanisms include:

  • Subsidies: One way the government can “pick winners” among a variety of technology startups is to distribute cash through competitions hosted by public-private collaboration platforms, such as China’s Artificial Intelligence Industry Alliance (AIIA).
    • For instance, having won first place at an AIIA competition in 2018, Chinese AI company iDeepWise received $75,400 (500,000 RMB) in cash rewards and $3 million (20 million RMB) in R&D subsidies over three years. While these sums are not huge, they can help early-stage companies raise their profile, get more funding, and commercialize. In 2019, iDeepWise became the first AI company to get funding from Huawei’s venture capital arm, Hubble Technology Investment.
  • Government Guidance Funds: Government guidance funds are public-private investment funds the Chinese government uses to infuse capital in strategic priority sectors like AI and other emerging technologies. By 2022, Chinese officials had reportedly set up 2,107 guidance funds, with a registered target size of $1.86 trillion (12.84 trillion RMB). However, a 2023 Zero2IPO report indicates that these funds had only raised a total of $940 billion (6.51 trillion RMB) from private and public sources. While guidance funds face a number of challenges, they still have advantages over traditional industrial policy mechanisms like subsidies and tax incentives.

International Outreach

Over the past decade, Chinese AI investment activity has mainly been concentrated in the United States, and the sum of funds transferred from investors in China to AI companies in the United States has far surpassed any other investment relationship around the world (Figure 1). That said, Chinese investors have increasingly targeted promising AI companies in other regions—a trend that may grow as the Chinese economy slows down and as the U.S. government imposes additional regulations on U.S. investment in China’s tech sector. Between 2010 and 2021, we observed the following trends in AI-related investment:

  • The Quad: Among the Quad countries, the United States has the strongest AI investment ties to China. Meanwhile, Australia, India, and Japan each have more AI investment activity with China than they do with one another.
  • Southeast Asia: Chinese investors are less active throughout Southeast Asia than investors from the United States. Although Chinese investment in the region’s AI ecosystem is still limited, it has increased over the past decade. Additionally, China’s tech giants are developing other commercial AI linkages to the region, primarily in Singapore, and to a lesser extent, Indonesia and Malaysia.
  • Russia: Despite reports of growing technology cooperation between China and Russia, up to 2021, Chinese investors have put forth little capital to support Russia’s nascent AI ecosystem.

Figure 1: Chinese Investment in AI Companies across the Quad Countries, Southeast Asia, and Russia (2010-2021).

Note: Investment transactions often include investors from different countries, and Crunchbase data does not provide information on how much each investor contributes in a given round. As such, transaction value refers to the overall sum raised by a given AI company during that particular investment round rather than the amount of money put forth specifically by Chinese investors. Source: CSET analysis of Crunchbase.

Future Outlook

Our research shows that the Chinese government, in conjunction with the country’s tech giants, is pursuing a variety of domestic and international initiatives to shore up investment in AI and meet China’s strategic objectives. Although we cannot predict whether these efforts will be successful, it is important to continue to study, track, and monitor China’s AI development, at home and abroad. As we look to the future, the following areas and indicators merit attention:

  • China-U.S. AI-related investment activity: How will recent U.S. government policies that impose greater scrutiny or restrict U.S. investment in China’s tech sector affect the extensive AI-related investment activity between the two countries? 
  • International vs. domestic AI investment: With growing demand for capital in emerging economies and the slowing down of the Chinese economy, Chinese investors may look to grow their financial and technology footprint in regions like Southeast Asia, Latin America, or Africa where the United States lacks a strong presence, potentially at the expense of investment in the domestic AI ecosystem. How will the Chinese government and the leading technology companies balance indigenization efforts with the pressure to expand internationally?

Understanding Chinese Government Guidance Funds

 March 2021

China’s government is using public-private investment funds, known as guidance funds, to deploy massive amounts of capital in support of strategic and emerging technologies, including artificial intelligence. Drawing exclusively on Chinese-language sources, this report explores how guidance funds raise and deploy capital, manage their investment, and interact with public and private actors. The guidance fund model is no silver bullet, but it has many advantages over traditional industrial policy mechanisms.

China’s Artificial Intelligence Industry Alliance

 May 2021

As part of its strategy to achieve global leadership in AI, the Chinese government brings together local governments, academic institutions, and companies to establish collaboration platforms. This data brief examines the role of China’s Artificial Intelligence Industry Alliance in advancing its AI strategy, and the key players in the Chinese AI industry.

Chinese AI Investment and Commercial Activity in Southeast Asia

 February 2023

China’s government has pushed the country’s technology and financial firms to expand abroad, and Southeast Asia’s growing economies — and AI companies — offer promising opportunities. This report examines the scope and nature of Chinese investment in the region. It finds that China currently plays a limited role in Southeast Asia’s emerging AI markets outside of Singapore and that Chinese investment activity still trails behind that of the United States. Nevertheless, Chinese tech companies, with support from the Chinese government, have established a broad range of other AI-related linkages with public and commercial actors across Southeast Asia.

Quad AI

 May 2022

Through the Quad forum, the United States, Australia, Japan and India have committed to pursuing an open, accessible and secure technology ecosystem and offering a democratic alternative to China’s techno-authoritarian model. This report assesses artificial intelligence collaboration across the Quad and finds that while Australia, Japan and India each have close AI-related research and investment ties to both the United States and China, they collaborate far less with one another.