DeepSeek

(English Version)

DeepSeek: China’s AI Breakthrough and Its Geopolitical Implications

By Dr. Samuel Jung, Associate Professor of Economics

Just a week after Donald Trump’s re-election, a shocking development shook the AI industry. The Chinese startup DeepSeek unveiled a powerful AI model that sent ripples through global markets, triggering a $500 billion drop in Nvidia’s stock value. This breakthrough, developed by a Chinese startup founded in 2023, claimed GPT-4-level performance at an astonishingly low cost of just $6 million. Even more surprising, DeepSeek was released as an open-source model, disrupting the AI landscape.

However, as much as DeepSeek gained global attention, skepticism also followed. Some argued that Chinese AI technology still lagged behind the U.S., while others speculated that China had copied American innovations. From a Western perspective, there are key aspects of this event that might be overlooked.

1. Xi Jinping’s Third Term and China’s Economic Challenges

In 2018, China amended its constitution, abolishing presidential term limits and securing Xi Jinping’s long-term leadership. However, the Chinese economy is now facing serious headwinds. Once boasting double-digit growth rates in the 2010s, China’s GDP growth has slowed to just 5.2%. The country is also grappling with:

The collapse of major real estate giants like Evergrande (恒大) and Country Garden (碧桂园).

Youth unemployment exceeding 20%.

Deflationary pressures caused by industrial overcapacity.

Adding to these difficulties, Trump’s return to the White House has intensified economic pressure on China. He immediately imposed a 10% universal tariff on Chinese imports and, on February 10, 2025, signed an executive order imposing a 25% tariff on all steel and aluminum imports—a measure clearly targeting China, given its 54% share of the global steel market (as of 2022) and 59% share of aluminum (as of 2023).

Amid this economic turbulence, the announcement of DeepSeek was not merely a technological milestone but a strategic move with political significance. On its release day, DeepSeek was heavily promoted by China’s state media, including the People’s Daily and Douyin (China’s version of TikTok), portraying it as a symbol of China’s technological rise.

2. DeepSeek as a Symbol of China’s Technological Rise

The Chinese Communist Party has long emphasized collective sacrifice for national progress—a concept deeply rooted in Confucius’s philosophy of "Great Unity" (大同社会), which envisions an ideal society of equality and harmony. The state has continuously reinforced the narrative that individual hardships serve a greater national purpose.

Despite the economic downturn, China has been pursuing its ambitious technological rise since joining the WTO in 2001, accelerating its export-driven growth and investing heavily in innovation. As a result, China is now home to seven of the top ten universities in the Nature Index 2023 rankings for scientific research, with Harvard as the only U.S. university remaining in the top ten.

(Figure 1: Top 10 research institutions (Science and Tech) worldwide according to the Nature Index )

The launch of DeepSeek was more than just an AI innovation; it was a strategic event aimed at demonstrating China’s growing power in AI development. Given China’s economic struggles, the government leveraged this moment to boost national pride, reinforcing the idea that China’s technological rise outweighs individual economic hardships.

3. The Yuan and Dollar: China’s Response to Currency Volatility

During the 2024 U.S. presidential election cycle, the exchange rate stood at 7.01 yuan per U.S. dollar (as of September 27, 2024). However, as Trump’s lead in the polls increased, the yuan depreciated sharply, peaking at 7.33 yuan per dollar (as of January 15, 2025), just before his inauguration.

Interestingly, following the announcement of DeepSeek, the yuan rebounded to 7.17 per dollar (as of January 29, 2025). This suggests that China’s AI breakthrough may have stimulated foreign investment interest, leading to increased demand for the yuan.

China has been actively working toward the internationalization of the yuan (RMB), seeking to enhance its role in the global financial system. In 2015, the People’s Bank of China (PBoC) attempted to liberalize the currency market but was forced to intervene when the yuan depreciated sharply. The PBoC actively defended the yuan by purchasing government bonds in Hong Kong’s foreign exchange market.

Given rising U.S.-China trade tensions under Trump, another wave of yuan depreciation seems inevitable. However, strategically orchestrated events like the DeepSeek announcement could attract foreign investment and stabilize the yuan. If China can leverage its technological advances to bolster its financial markets, it might partially offset the negative economic impact of Trump’s trade policies.

Conclusion: What Does DeepSeek Really Mean?

DeepSeek’s unveiling was more than just a technological milestone; it was a geopolitical maneuver signaling China’s ambitions in the global AI race.

China’s economy faces severe structural challenges, including a real estate crisis, soaring unemployment, and renewed U.S. tariffs.

The DeepSeek announcement was strategically framed as a national victory, shifting focus from economic hardship to technological progress.

As China closes the AI gap with the U.S., the competition for AI dominance will intensify, adding a new dimension to U.S.-China tensions.

DeepSeek’s impact on currency markets suggests that technological advancements may play a role in China’s financial defense strategy.

DeepSeek is not just an AI model; it is a symbol of China’s strategic ambitions. As AI innovation becomes a central battlefield in global power struggles, the world must closely watch how China’s technological rise reshapes the geopolitical landscape.