China warns US against AI sanctions as 200 startups push back

China's Ministry of Commerce on Monday urged the US to halt threats of sanctions against Chinese AI companies, calling the accusations of intellectual property theft a "typical form of AI hegemony" that lacks factual and legal basis.

"The US has ignored facts such as the very close release timing between Chinese AI models and leading US models, as well as the leading capabilities already achieved by some Chinese models," a spokesperson for China's Ministry of Commerce said, according to state-run Xinhua News Agency.

The dispute centers on US allegations that Chinese AI firm Moonshot used "distillation" techniques to replicate Anthropic's advanced Fable 5 model in its Kimi K3 system. US Treasury Secretary Scott Bessent warned that sanctions could follow if the claims are confirmed. China countered that many US companies have also distilled Chinese models during research and that nearly 200 US startups have publicly opposed cutting off access to Chinese open-source models, arguing it would weaken US competitiveness.

The escalation marks a new front in the US-China technology rivalry, which has already seen Washington restrict semiconductor exports and blacklist dozens of Chinese tech firms. AI is increasingly viewed by both sides as a strategic and national security priority, and any sanctions could disrupt the global AI supply chain, affecting companies from Nvidia Corp. to Advanced Micro Devices Inc. that rely on China for a significant portion of revenue.

The Chinese Commerce Ministry spokesperson said innovation "is not the monopoly of any party" and that Chinese AI companies have long focused on fundamental research while emphasizing both technological self-reliance and open cooperation. Beijing said it will take "all necessary measures" to safeguard its legitimate rights and interests against any actions that substantially harm China's interests.

The accusations come as Chinese AI models have narrowed the capability gap with US counterparts at an accelerating pace. Moonshot's Kimi K3, released earlier this year, demonstrated front-end coding capabilities that rivaled leading US models, according to benchmark comparisons cited by analysts. The US has pointed to the close timing of these releases as circumstantial evidence of distillation, though China argues it reflects years of sustained investment in fundamental research.

The last major US escalation against Chinese tech — the October 2022 semiconductor export controls — triggered a 20% decline in the Philadelphia Semiconductor Index over the following month while accelerating China's push for domestic chip self-sufficiency. A similar dynamic could play out in AI, with sanctions potentially spurring Chinese firms to deepen reliance on domestic alternatives from companies such as Huawei Technologies Co. and Baidu Inc.

For global investors, the dispute introduces regulatory uncertainty across the AI value chain. Nvidia, which generates roughly 20% of its revenue from China, faces the most direct exposure, while US AI startups that rely on Chinese open-source models for training could also be affected. The nearly 200 US startups that urged the government to maintain access to Chinese models underscore the interdependence of the two AI ecosystems.

China expressed hope that the US would implement the consensus reached by the two countries' leaders and strengthen AI dialogue and communication. But Beijing's warning of countermeasures signals that it is preparing for a prolonged confrontation, with the next flashpoint likely to be the US investigation into Moonshot's alleged distillation practices.

This article is for informational purposes only and does not constitute investment advice.