What advanced AI means for China's economic outlook

The emergence of new artificial intelligence models in China could drive faster development and adoption of the technology in the country than previously projected, according to Goldman Sachs Research. Should AI gain traction, it could boost productivity and GDP growth in the world’s second-largest economy.

China’s AI advancement has accelerated since our researchers examined, in 2023, the potential impact of generative AI on the country’s economic growth. The number of foundation models, which represent cutting-edge AI research, climbed to 20 by the end of that year, surpassing the combined total of the EU and UK.

The release of DeepSeek’s model, which may have been developed at lower cost than other leading models, suggests a faster adoption rate and greater economic upside for China than previously anticipated, Goldman Sachs Research economists Hui Shan, Joseph Briggs, and Xinquan Chen write in the team’s report. Faster adoption of generative AI in China could translate into lower labor costs and higher productivity as more tasks are automated. 

Goldman Sachs Research now estimates that generative AI will start raising potential growth in China by 2026 and provide a 0.2-0.3 percentage point boost to China’s GDP by 2030, up from 0.1 percentage point previously. The team adjusted its estimate for the potential uplift to GDP but didn’t change its forecast for real GDP growth “given the uncertainty associated with the future path of AI development and adoption.”

How will AI affect China’s economy?

Our researchers’ initial forecasts assumed China would see a similar AI boost as other advanced emerging market economies, implying only a 10-20% rate of adoption by 2030 before peaking in the mid- to late-2030s. However the AI development in China over the past 12-18 months and the recent DeepSeek breakthrough suggest the timeline for adoption could be faster.

Goldman Sachs Research now expects AI adoption rates in China to exceed 30% by 2030, peak in the early 2030s, and achieve full adoption within the next 15 years. If that occurs, AI adoption in China would track more closely with the experience of developed economies than those in emerging markets.  

While AI adoption in China may happen faster than expected, our economists think the impact may be front-loaded, and the overall effect could be slightly smaller than previously predicted.

Compared to the US, the Chinese labor market is less prone to AI automation, due to its higher share of physical jobs. For example, agriculture, manufacturing, and construction trades account for about half of all jobs in China, well above their 19% share of total employment in the US. Meanwhile, sectors that are more exposed to AI-driven task automation — such as finance and insurance, and professional and technical services — constitute less than 3% of jobs in China, compared with 14% in the US.

After incorporating more detailed industry-level employment data in China, Goldman Sachs Research nudged down its forecasts for AI’s likely uplift to overall GDP over the next 10 years from 9% to 8%. That’s well below the expected 15% lift in the US.

“Although the total effect after full AI adoption is marginally lower than our previous estimate, the impact over the next few years is likely to be more positive due to the faster adoption timeline,” the team writes.

How much is China investing in AI?

Chinese companies’ ability to improve performance while reducing costs and computing power requirements will continue to boost capital expenditures and investment, according to Goldman Sachs Research analysts. The race to develop AI agents and applications is resulting in higher investment throughout the tech ecosystem in China — including semiconductors, data centers, cloud services, software, and telecommunication companies. Our equity analysts expect China’s four biggest AI model developers to increase their total capex by 38% in 2025.

AI-related spending by tech companies is expected to increase sharply over the next few years as they build up AI infrastructure, platforms, and applications. And as AI applications are developed and mature, the non-tech sector is likely to increase spending to incorporate end-use AI services into regular production later in this decade. Our economists expect total AI-related spending will account for close to 1% of China’s annual GDP in the coming years. 

How will AI affect China’s labor market?

The main economic impact from generative AI is expected to come from task automation that raises productivity. Our economists point out that implementation of these new technologies will need to be managed carefully, particularly given the current weak state of China’s labor market and persistent deflationary pressures. Some 15% of young people are unemployed, and in recent years more than 10 million students have graduated from colleges annually.

“Amid a severe housing downturn, increased efforts to rein in local government implicit debt, and regulatory tightening in the financial industry, job losses have been reported in the real estate sector, among civil servants, and in the financial sector,” the team writes. “In this environment, job destruction by AI adoption, while raising labor productivity, could exacerbate deflation, erode confidence, and further weaken the economy.”

In the near term, the race for AI development could boost tech sector employment modestly, while the lack of mature AI applications implies minimal job displacement in the non-tech sector. Then, a few years down the road, the number of displaced workers may jump in both tech and non-tech sectors as AI becomes ready for mass adoption.

The experience of other productivity-enhancing technology cycles suggests it may take several years for displaced workers to eventually find jobs in other sectors. But eventually, employment may grow again in the last stage of the labor market adaptation to AI adoption.

That said, AI could help China reckon with a population that’s expected to age more quickly than other major economies. The country’s working-age population (15-64-year-olds) may contract by 25% over the next 25 years. “AI and robotics could provide an answer to the aging society,” according to Goldman Sachs Research. 

 

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