Yuan Falls: Why China's AI Sector Pays a 'Dollar Tax'

While the global community watches the release of new language models with bated breath, in the quiet offices of the People's Bank of China, decisions are being made that influence the AI industry no less than new transformer architectures. Today, the regulator set the average exchange rate of the yuan to the dollar at 6.9695.

This is a drop of 17 points compared to the previous day. On the surface, the figure seems insignificant, but in the context of technological confrontation, it is an important indicator of hidden pressure on China's high-tech sector. We must understand that the modern artificial intelligence race is first and foremost a race of capitals.

The primary currency here is not only tokens, but dollars, which are used to buy silicon. Despite all efforts at import substitution, Chinese companies remain critically dependent on global supplies. Even if we're not talking about direct purchases from NVIDIA, which are restricted by sanctions, the secondary market and gray channels for H100 or A100 accelerators operate exclusively tied to the American currency.

A weakening yuan means that for a hypothetical startup from Shenzhen, each new server cabinet becomes more expensive simply by crossing the border. This situation creates an uncomfortable dilemma for giants like Tencent or Alibaba. On the one hand, they are obligated to maintain the pace of training their models to keep up with GPT-4 or Claude 3.

On the other hand, infrastructure costs are rising not only due to supply shortages but also due to exchange rate differences. Domestic prices for cloud computing in China are extremely competitive, and raising them now would mean slowing AI implementation in the real economy. As a result, companies are forced to sacrifice margins, which in the long term reduces their investment potential.

Moreover, it's worth considering the psychological and economic barrier. When the exchange rate of the yuan approaches 7.0 per dollar, it always causes investor nervousness.

For the AI sector, which lives on expectations of future growth, any instability in national currency complicates the attraction of international capital. Venture funds operating in dollars begin to factor in additional risks, making the valuation of Chinese "unicorns" less attractive. We've already seen how similar fluctuations forced companies like Biren Technology to reconsider their plans for expanding R&D centers.

Interestingly, the current weakening of the yuan is happening against the backdrop of Beijing's attempts to stimulate domestic demand. A weak currency usually helps exporters, but China's AI industry is currently in a phase of active consumption, not technology export. They need lithography machines, they need HBM3 memory, they need specialists whose salaries in Shanghai are already beginning to compete with California's.

And for all of this, they have to pay with resources that become more expensive with each point of currency decline. Ultimately, this dynamic will only drive China's desire for complete technological autarky. If you cannot control the cost of tools for creating the future due to currency volatility, the only way out is to create your own tools and your own financial ecosystem.

However, the process of creating full-fledged alternatives to accelerators from Huawei or Moore Threads takes years, while electricity bills and imported components must be paid for now. While the yuan searches for a foothold, Chinese engineers are learning to squeeze the maximum from the hardware that has already been imported into the country. The key point: the weakening of the yuan is an invisible tax on Chinese innovations that could slow the pace of training new models more than another round of US export restrictions.

Will local chip manufacturers be able to seize the moment and offer the market a cheaper alternative?