DeepSeek has changed how the world sees China. Worries over the country’s “3D” problem — that deflation, debt and demographics are structurally hampering growth — have melted away. Instead, investors are talking about how the world’s second-largest economy could take on the US and challenge its technological dominance.
There is the prevailing sense that China’s “engineer dividend” is finally paying off. Between 2000 and 2020, the number of engineers has ballooned from 5.2 million to 17.7 million, according to the State Council. That reservoir could help the nation move up the production possibility frontier, the thinking goes.
In a way, DeepSeek should not have come as a surprise. Size matters. A bigger talent pool alone gives China a better chance to disrupt. In 2022, 47 percent of the world’s top 20th percentile artificial intelligence (AI) researchers finished their undergraduate studies in China, well above the 18 percent share from the US, according to data from the Paulson Institute’s in-house think tank, MacroPolo. Last year, the Asian nation ranked third in the number of innovation indicators compiled by the World Intellectual Property Organization, after Singapore and the US.
What this also means is that innovative breakthroughs can pop out of nowhere. Hangzhou-based DeepSeek, for one, was not spawned from the prestigious Tsinghua University in Beijing. Its founder, Liang Wenfeng (梁文鋒), went to Zhejiang University, a respected institution, but by no means China’s Harvard. This month, Manus AI once again fueled questions about the US lead on AI by launching a sophisticated product capable of carrying out complex tasks such as stock analysis and resume screening. Chief executive Xiao Hong (肖弘) studied software engineering at Huazhong University of Science and Technology in Wuhan, an even lesser-known school.
Or consider start-up Unitree Robotics, whose “kung fu bots” are at the forefront of the US-China race to mass produce AI-powered humanlike robots. Its founder, Wang Xingxing (王興興), only managed to attend a local university in Shanghai, because his English exam score was dismal. In other words, do not just look at the top 1 percent to judge what China could achieve. Today, graduates from lower-ranked universities and living in smaller cities are coming out with innovations that dazzle.
More importantly, China’s got the cost advantage. Those under the age of 30 account for 44 percent of the total engineering pool, versus 20 percent in the US, according to data compiled by Kaiyuan Securities. As a result, compensation for researchers is only about one-eighth of that in the US.
Credit must be given to Chinese President Xi Jinping (習近平) for his focus on higher education as he seeks to upgrade China’s value chain. These days, roughly 40 percent of high-school graduates go to universities, versus 10 percent in 2000. Meanwhile, engineering is one of the most popular majors for post-graduate studies.
It is a welcome reprieve for a government that has been struggling with a shrinking population. Last year, only 9.5 million babies were born, a sharp decline from about 15 million annually before the pandemic. This number was particularly ominous — last year was the Year of the Dragon, which, according to Chinese zodiac beliefs, is considered an auspicious time to have children. An aging society, combined with worries that the exports-driven growth engine is losing steam, are leading to worries that China might become the next Japan, lost for decades to come.
The engineer narrative therefore heralds a fresh growth model. Yes, China’s labor force is aging rapidly. Yes, compared with Southeast Asia, wages have become too high for traditional exports such as smartphones and apparel. However, its engineers are still young, cheap and abundant. As a result, they open new possibilities for the country, perhaps even rivaling the West in the development of biotech, humanoid and AI applications.
By now, Beijing has practically given up defending its traditional export sectors, knowing full well the country has lost its key advantage. Instead, it would double down on developing the engineering talent pool for new sources of growth. As such, those with a bullish thesis on US tech need to consider the structural challenge China poses: Would it disrupt tech just like it did with clothes and houseware?
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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