DeepSeek deep sixes US tech stocks; Wang Yi-Rubio call; CIA on COVID origins; PRC carbon peaking?; Generic drugs scandal

The official Spring Festival holiday runs from January 28th to February 4th. Regular issues of the newsletter will return on February 5th, though we will record an episode of Sharp China this week and I am hoping to have a video conversation about DeepSeek from two well-informed guests Thursday or Friday. Details will be forthcoming if I can get it together.

Happy Year of the Snake!

Summary of today’s top items:

1. DeepSeek - DeepSeek’s open source AI breakthroughs tanked US tech stocks, and especially Nvidia. The reaction looks overblown to me, but I do not give investment advice so do not take my word on that. The world class engineers at DeepSeek have clearly made some very good innovations, though they spent a lot more than the $6 million or so figure touted by some. The leadership of the company has also been explicit on multiple occasions that access to advanced chips is a bottleneck, including in a meeting last week with Premier Li Qiang, according to the Wall Street Journal:

At their Jan. 20 meeting, DeepSeek’s Liang told Chinese Premier Li Qiang that while Chinese companies were working to catch up, American restrictions on the export of advanced chips to China were still a bottleneck, according to people familiar with the meeting

So while investors sort through the carnage today, and US firms like Meta set up “war rooms” to figure out exactly what DeepSeek did and how to copy them to become more efficient in spite of their wealth of capital and compute compared to DeepSeek, there will also be renewed pressure over the US export controls. Have they failed, as industry and others argue, or have they not been stringent enough, as I hear people with more of a national security background arguing? It is going to be an interesting debate to watch play out, but whatever the final answer, DeepSeek now has a massive target on its back.

Earlier today Nvidia issued a statement about DeepSeek:

DeepSeek is an excellent AI advancement and a perfect example of Test Time Scaling. DeepSeek’s work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant. Inference requires significant numbers of NVIDIA GPUs and high-performance networking. We now have three scaling laws: pre-training and post-training, which continue, and new test-time scaling.

I think they are saying that DeepSeek’s approach to inference is so creative it will drive even more demand for Nvidia chips like the H20, the best inference chip on the market. I would not be surprised if one result of DeepSeek’s breakthroughs is the Trump Administration deciding to ban the export of the H20 to the PRC.

Making their work open-source is a brilliant move by DeepSeek, and whatever the Trump Administration decides about export controls it will likely cause an even greater split over AI between the US and its close friends and the rest of the world, and especially the Global South.

Who had a PRC AI firm possibly popping the US AI stock bubble on their “black swan/grey rhino” list?

2. Rubio and Wang Yi have a call - The PRC’s Director of the Office of the CCP Central Foreign Affairs Commission and Foreign Minister Wang Yi and new US Secretary of State had a call Friday. The readouts contained no surprises, though the US gave Wang Yi the wrong title - Director of the CCP Central Foreign Affairs Commission - and Wang Yi used a term - “好自为之” - that carries a sharp edge. The PRC English readout translated it euphemistically as “hope you will act accordingly”, but as a CCTV WeChat account, and others, pointed out, it really is better understood as "make the right choice", "be very prudent about what they say or do", or "make the right decision".

3. CIA now leans toward lab leak origin of COVID - In the final months of the Biden Administration then CIA director Burns ordered a review of the intelligence about the origins of COVID and told the people working on the review to take a position on where they think it came from, even though they apparently had no new intelligence. That review was completed before the Trump inauguration, and new CIA Director Ratcliffe had the agency issue a public statement that “CIA assesses with low confidence that a research-related origin of the COVID-19 pandemic is more likely than a natural origin based on the available body of reporting.” Ratcliffe has long argued the likely origin was a lab leak, and last summer in a Newsweek OpEd he wrote that US law should be changed to “empower American victims of COVID-19 to hold Chinese entities liable through mass tort class action lawsuits”. Reopening the question of COVID origins is not going to endear the Trump Administration to the PRC, though so far we have not heard Trump himself weigh in on this shift from the CIA.

4. Xi’s New Year’s message - At the annual reception for Spring Festival Xi said that “through perseverance and hard work, we have once again demonstrated that no difficulty or obstacle can halt the Chinese people’s progress toward a better life, nor impede our historical advance in building a strong country and achieving national rejuvenation”.