Introduction to China’s AI Industry Crisis
China’s AI industry is facing a major crisis. Just a few months ago, the country was experiencing a boom in data center construction, fueled by government and private investors. However, many of these newly built facilities are now sitting empty, and the companies running them are struggling to stay afloat.
The Rise and Fall of the Data Center Boom
The main business model for these data centers was renting out GPUs to companies that need them for training AI models. This was once seen as a sure bet, but with the rise of DeepSeek and a sudden change in the economics around AI, the industry is faltering. According to people on the ground, including contractors, an executive at a GPU server company, and project managers, most of the companies running these data centers are struggling to stay afloat. Local Chinese outlets report that up to 80% of China’s newly built computing resources remain unused.
Causes of the Crisis
The growing pain China’s AI industry is going through is largely a result of inexperienced players—corporations and local governments—jumping on the hype train, building facilities that aren’t optimal for today’s needs. Jimmy Goodrich, senior advisor for technology at the RAND Corporation, says that this has led to projects failing, energy being wasted, and data centers becoming "distressed assets" whose investors are keen to unload them at below-market rates.
A Chaotic Building Boom
When ChatGPT exploded onto the scene in late 2022, the response in China was swift. The central government designated AI infrastructure as a national priority, urging local governments to accelerate the development of so-called smart computing centers—a term coined to describe AI-focused data centers. In 2023 and 2024, over 500 new data center projects were announced everywhere from Inner Mongolia to Guangdong. State-owned enterprises, publicly traded firms, and state-affiliated funds lined up to invest in them, hoping to position themselves as AI front-runners.
Consequences of the Crisis
The situation may eventually prompt government intervention, with the Chinese government likely to step in, take over, and hand off the distressed assets to more capable operators. Traders are now more discreet in their dealings, and prices have come back down to earth. Meanwhile, two data center projects are struggling to secure further funding from investors who anticipate poor returns, forcing project leads to sell off surplus GPUs. As one industry insider notes, "It seems like everyone is selling, but few are buying."
Conclusion
China’s AI industry is facing a major crisis, with many newly built data centers sitting empty and companies struggling to stay afloat. The causes of the crisis are complex, but it is clear that the industry’s growth was fueled by hype and inexperience. As the situation continues to unfold, it is likely that the Chinese government will step in to intervene and help the industry get back on track.
FAQs
- Q: What is causing the crisis in China’s AI industry?
A: The crisis is caused by a combination of factors, including the rise of DeepSeek, a sudden change in the economics around AI, and the inexperience of corporations and local governments jumping into the industry. - Q: How many data center projects were announced in China in 2023 and 2024?
A: Over 500 new data center projects were announced in China in 2023 and 2024. - Q: What is the current state of China’s newly built computing resources?
A: According to local Chinese outlets, up to 80% of China’s newly built computing resources remain unused. - Q: What is likely to happen to the distressed data center assets?
A: The Chinese government is likely to step in, take over, and hand off the distressed assets to more capable operators.
