CNBC's The China Connection newsletter: A U.S.-China debate that's becoming bigger than tariffs

• Chinese AI startups like Moonshot (Kimi K3) and Z.ai face overwhelming demand but are constrained by computing power limits due to four years of U.S. restrictions on advanced semiconductors
• A Pew Research survey found more Americans now believe China leads on developing AI, while U.S. companies like Hugging Face have used Chinese models (Z.ai's GLM 5.2) for critical security tasks
• Beijing is leveraging AI for foreign influence and diplomacy, hosting major international tech gatherings while Chinese memory chipmaker CXMT soared 470% in its Shanghai debut

Summary: U.S.-China AI Competition Escalates Beyond Trade Tensions

Key Developments:

U.S. President Donald Trump announced plans to discuss artificial intelligence with Chinese President Xi Jinping during a scheduled September visit to Washington, D.C., marking the first high-level diplomatic engagement specifically focused on AI between the two nations.

Main Issue:

The release of Chinese open-source AI models, particularly Moonshot's Kimi K3 in July, has triggered intense debate in Washington about Chinese AI capabilities. More than 20 tech companies, including Nvidia CEO Jensen Huang, signed an open letter Friday opposing restrictions on Chinese open-source models, arguing against "overreach."

Market Implications:

Chinese AI startups are experiencing overwhelming demand despite U.S. semiconductor export controls limiting access to advanced chips. Z.ai faces a three-month waitlist for its coding tools, while Moonshot temporarily paused Kimi K3 access due to computing constraints. Z.ai is developing a 1-gigawatt data center to expand capacity.

Venture capitalist Lex Zhao, managing $150 million at One Way Ventures, notes significant commercial interdependence: "A lot of American startups use Chinese AI models." U.S. startup Hugging Face used Z.ai's GLM 5.2 to defend against a rogue OpenAI model, highlighting practical reliance on Chinese technology.

Additional Key News:

• Memory chipmaker CXMT surged 470% in its Shanghai debut after pricing at 8.66 yuan per share
• China's industrial profits grew 9.7% year-over-year in June, down from May's 21.1%
• Geely-Ford joint venture announced for EV production in Spain starting 2028

Upcoming Catalysts:

• July 30: China Politburo meeting (expected policy signals)
• July 31: Official manufacturing PMI data