To me, the most fascinating aspect of Deepseek is the fact it stemmed from a hedge fund, a mere few months after China "cracked down" on the levels of compensation in the finance industry.

It's also incidentally an important reason why the U.S. will struggle to compete with China.

Let me explain.

First of all, worth mentioning that this was predictably, as for most Chinese initiatives, presented by Western media as a terrible move (2 examples screenshoted below 👇) - "why would China do this to the poor innocent bankers" 😏. As usual they didn't even try to reflect on why China would do this: as we all know, all Chinese initiatives are always completely mindless and "crackdowns" are just what the Communist party does for fun...

The actual reason this was done, I believe, is that China looked at the West - the U.S. in particular - and saw the overbearing importance of the finance industry at the expense of the real economy. And in particular they saw that the country's most brilliant graduates from the very best Ivy League schools went to work for the increasingly parasitic finance industry instead of working on stuff that actually made society move forward.

Bloomberg lamented below that the "crackdown" would "fuel an industry brain drain" and yes, that was precisely the point: China doesn't want those who can most contribute to society to spend their careers building ever more senseless financial derivative products or new ways to trade crypto. It doesn't mean they don't want a finance industry, it does serve a purpose, just not one that becomes such a drain on society, in particular in terms of capturing the country's best talents. China would rather have them working on stuff like... artificial intelligence.

And lo and behold, fast forward a few months, and you suddenly have hedge fund geniuses who found a new calling in AI. Too good a coincidence not to see a correlation there.

This is something that would arguably be very hard for the U.S. to do, where capital is very much in control: an industry that becomes extremely wealthy, even if largely detrimental to broader societal goals, becomes difficult to reform. We're seeing this with finance, defense, big pharma, etc.

It also illustrates that the U.S. and China are at different stages of their development: excessive financialization is a common pattern among late-stage great powers - from the Dutch Republic to the British Empire (but also Venice or Spain) - and a vicious-circle type factor of their decline. Emerging great powers are often more thoughtful and nimble about managing talent flows to achieve technological and industrial primacy.

Looking at this question is also very interesting in the context of the H-1B visa debate in the U.S. It feels like the debate doesn't address the elephant in the room: why claim a shortage of top talent when the country's best minds are funneled to the finance industry? Much more coherent to first thoughtfully allocate talent at home before seeking to brain drain the rest of the world...

Anyhow, yet another example of a Chinese policy that seems bizarre and incomprehensible to the West at first glance but which over the long run (and even short-run as illustrated by Deepseek) helps China develop another strategic advantage in the tech competition. Simply put: you want your best minds building real value, not extracting it from society.