AI Revolution: China’s Five-Year Plan

0:01Patrick Coffey:Welcome back to the Barclays Brief Podcast. Today I'm joined by Kaan Singh from the Barclays Equity Tactical Strategies team in our markets division. We're going to talk about all things China, but specifically China tech and China AI. Kaan, thanks so much for joining today. Where are you? What's going on? Hey, Patrick. Thanks for having me on. It's great to be here. I'm actually in Hong Kong today, and I'm heading to Singapore tomorrow for our flagship macro conference there, Barclays Asia Forum, which is actually in its 19th year. And we have a great set of speakers. Again, we outdo ourselves every year, and there's over 1000 clients attending.

0:39So it's going to be a very busy week for us in Asia.

0:41Patrick Coffey:I think it's going to be a very busy week for Barclays in Asia. It's going to be a very busy week in Asia, full stop, I think. We have President Trump meeting Xi Jinping later in the week. And obviously, there's been a huge number of news headlines coming out about China, US trade deals. Meanwhile, China's also laid out its 15th five-year plan, talking about its tech and economic priorities. Now, those plans tend to signal the broad direction the country's going to go in economically and socially. So, Khan, unpack it for us, explain what's going on and give us the context? Yeah, absolutely. A lot is the answer.

1:17And you're absolutely right. You know, there's been a lot of headline volatility since September and putting it in context is important. The easiest way of really framing this, Patrick, is U.S. and China are going through both tech and economic decoupling. And while the economic side cannot really be severed without very large consequences for the global economy, we're actually now firmly in the phase of China rebuilding its tech ecosystem with different blueprints and different materials with a very different set of economic incentives. And what I mean by that is the focus in China is actually no longer about catching up to the West.

1:55It's about tech self-reliance, which, as you mentioned, the 15th five-year plan emphasized. And it's actually about creating the self-sustaining parallel tech stack that can operate completely independently. And we all saw the headlines around rare earth. I actually don't think it's a coincidence that those headlines were announced just weeks after China launched its AI plus industrial policy.

2:19Patrick Coffey:Right. So that focus on no longer trying to catch up with the West, but instead creating a self-sustaining tech stack is what kind of came up in the 15th five-year plan talking about technological self-reliance. But can we just dig in then to the China AI plus industrial policy? What's happening there? Just explain that for our listeners. Yeah, it's really interesting. And, you know, AI plus is this broad and I would say probably the most comprehensive to date blueprint of how China is going to diffuse AI into 90 percent of its economy by 2030. That's the goal. So think about a world where AI assistants are embedded in most facets of your life.

3:01So be that home appliances or wearable devices or municipal services or even just smart city infrastructure where energy use can be optimized in real time. And while this timeline may sound ambitious or even the concept of this may sound like a sci-fi reality, let's actually not forget that China has used this playbook before. So in the mid-2010s, when I first came out to Hong Kong, China used an Internet Plus strategy to diffuse Internet applications into the real economy. And this actually led to the dominance of what we know today as China's super apps. So AI plus in a nutshell is looking at six sectors that China has prioritized and they're going to use AI to diffuse their structural goals and priorities for these sectors and how they imagine 2030 and 2035 to play out.

3:54Patrick Coffey:Sadly, we don't have time to talk about all six of those sectors. But this concept of diffusing AI into society and businesses and behaviors does sound a bit like a sci-fi reality to me. But it's been a long time coming. And yet markets didn't really wake up to AI's potential in China until early this year when we had this deep seek moment that rocks markets globally. How should we think about China versus the US in the AI race? Yeah, I mean, I think AI is too broad a concept in 2025 to be able to kind of distill it down to just a few metrics and then weigh the two countries on who's first versus the other.

4:33But top down, we can think about AI as driving soft power, so say data, and on the other hand, hard power. So for simplicity, let's anonymize that with physical infrastructure. U.S. currently leads in AI software and China in physical AI. And, you know, Patrick, I was listening to this TED Talk recently that Kai-Fu Lee delivered in the U.S., and I think he nails this current divergence between U.S. and China. So in a nutshell, in the U.S., where labor costs are high and paying for software subscriptions is widespread, any AI tool that boosts white-collar productivity will command higher prices.

5:12Meanwhile, in China, the manufacturing tilt of the economy means that robotics and physical AI is a faster route to AI commercialization.

5:21Patrick Coffey:OK, that makes sense to me. But let's focus then on China physical AI. Particularly, I want to talk about robotics and I'll explain why in a minute. But just talk us through what AI in China looks like from the ground. Yeah, it's it's really fascinating how quickly it's developing across many different emerging technologies. And, you know, there's a lot of different priorities in terms of emerging tech, and there are many sub-themes from it. But really, if you look at the 10 kind of main themes, and AI, robotics, humanoids, biotech, quantum computing are some of these. Apart from the development and breakthroughs happening in each of these fields, what's very important to understand the entire sort of build out in China is that the country is very efficiently iterating on what it has learned from the past in terms of supporting innovation.

6:09You know, the government is working as a platform of sorts to concentrate resources on a few strategic verticals. And people in China call this deep infrastructure. So if you were to take Minhang district in Shanghai as an example, it used to actually be largely agricultural. But since 2018, it self-identified brain computer interfaces or BCIs as an initiative it wants to dive deeper into. And now, just a couple of years later, the entire district has essentially built its ecosystem around the Shanghai Brain Science Center. So all of this is to say that China is very good as a centralized economy to guide resources.

6:47And that's currently being fast-tracked to build an entire ecosystem around emerging tech and AI.

6:54Patrick Coffey:Incredible. And again, staggering speed with which these decisions are being made and executed in China. So I saw a clip recently of a humanoid robot running a half marathon in China. I've seen two human eyes have a fight in a boxing ring. I'm bringing it far closer to my home. I was at the theatre last night with my wife and kids, and there was a robo dog literally jumping through hoops. It blew my children's minds. It certainly blew the minds of everyone else in the audience as well. It looks so real. But what's actually happening with robotics in China and more specifically around humanoids?

7:28Yeah, so China has set pretty ambitious goals for humanoids and very similar to what they did for EVs and chips and solar. You're going to see this huge ramp up in production capacity, which will be met by domestic demand to a degree. But then eventually China is going to have to export a lot of that production away to rest of the world. And for humanoids, specifically in 2023, Beijing's Ministry of Industry and Information Tech, MIT, set this goal that they want to reach mass production of humanoids by 2025. And eventually, they want to make humanoids a new engine of growth by 2027. Now, halfway through that plan, China is actually seeing pretty decent ramp up.

8:14And what's happening as a result is robots are no longer weird in China. You know, they're actually everywhere. If you go to a major city like Shanghai, Shenzhen or Chengdu, chances are you will see a robot delivering you bubble tea or patrolling a park or even helping you out for your hotel check in.

8:34Patrick Coffey:Talk me through that. How quickly does society adapt to seeing these weird, as you say, humanoids, you know, walking down a grocery store or delivering your post? I think the adaption curve in China especially is very quick. And when you think about it, it's both from a structural standpoint. China is an aging society. So really, there are no better alternatives than having humanoids take care of an aging population or actually working at a factory or at a hotel. But at the same time, for Gen Z in China, this is the new norm. Yeah. And actually, my two-year-old yesterday didn't really see it as strange.

9:14Patrick Coffey:She just thought it was completely normal that there was a robo-dog jumping through hoops. So are humanoids and the development and speed with which humanoids are coming out of China going to be the next deep-seek moment for the market? Or what else could it be? Yeah, I think that's really the million-dollar question here. Probably a trillion-dollar question, I think. Yeah, that is true. The next big deep seek moment in China will probably be an announcement around China producing its own domestic lithography machine. And I think this will be crucial because currently this is the number one chokehold that China has to be able to mass produce leading edge chips.

9:53Patrick Coffey:OK, so we need to keep our eyes out for that over the next coming months and years. finally then the equity rally in China it's been strong it's been driven by AI is complacency kicking in here or do you still feel kind of positive yeah look I think there's definitely pockets of complacency but as a whole I think for markets we're probably going to be moving away from this dynamic of looking at China's tech gain as US's tech loss to realizing that there are actually national champions in both countries that can be seen as structural investments I could carry on for ages talking to you about this.

10:29Patrick Coffey:It's endlessly fascinating. We've got to call it a day there. Good luck at the Barclays Asia Forum. I am certain that a lot of what we've talked about today will be a key part of the debate this week. Thanks, Patrick. I'll be needing it. It was great being on here with you. Okay, so as Khan heads off to Singapore for the Barclays Asia Forum, and I head back to my desk here in London, here are three things I'm going to take away from this conversation. Firstly, the US and China are in the thick of a tech and economic decoupling. Secondly, humanoid robotics are incredibly well advanced in China and pricing is already coming down.

11:04Patrick Coffey:I liked how Khan explained that she thinks China will do to the humanoid market what it did to the EVs. And finally, it's the speed of innovation within AI in China and the speed with which society are adopting those AI innovations that really stands out for me. To read more about any of these topics you can see the links in the show notes.