Under the policy of the Communist Party of China (CCP) to pursue technological advancement, AI data centers have become a tool for local officials to showcase their achievements. Various cross-border enterprises have also joined the high-tech race, aiming to profit from government subsidies. Analysts believe that the low utilization of data centers has become a mirror image of the chip leap forward.
In the 1950s, in pursuit of surpassing Britain and catching up with the United States, the CCP mobilized the masses to use household utensils to smelt steel in the fields. In the 2010s, facing the US ban on chips, the CCP called for “domestic substitution” and aggressively built chip industrial parks, attracting many unqualified enterprises to enter the integrated circuit industry for quick gains, leaving behind a large number of unfinished projects.
Now, amid the fierce competition between the US and China for leadership in artificial intelligence (AI), a similar situation is unfolding. With the previous economic pillar – the real estate industry – experiencing its first decline in decades, officials are seeking new engines for growth.
Currently, countries around the world are accelerating their layout in the field of artificial intelligence. The US has enacted the “National AI Initiative Act of 2020” and updated the “National AI R&D Strategic Plan” to ensure its leading position in the field. The EU has established an AI office and aims to promote AI development through high-level governance with its “AI Act”.
The CCP is also vying with the West. CCP leader Xi Jinping stated, “Whoever seizes the opportunities in big data, artificial intelligence, and other new economic developments will lead the pulse of the times.”
After the US company OpenAI introduced ChatGPT in 2022, the CCP prioritized artificial intelligence infrastructure as a national priority, urging local governments to accelerate the development of so-called AI computing centers.
According to market research firm KZ Consulting, from Inner Mongolia to Guangdong, the CCP announced the establishment of over 500 data centers in 2023 and 2024. By the end of 2024, at least 150 newly built data centers will be operational, as per the China Communications Industry Association’s Data Center Committee data. Various enterprises are investing in these data centers, including flavor manufacturer Lotus Holdings and dye company Jinjiu Co., Ltd.
These unrelated companies investing in artificial intelligence data centers echo the situation in 20th-century China when people used earthen furnaces and firewood to smelt steel.
In 1958, following the CCP Central Committee’s resolution for “the entire Party and the whole country to strive for the production of 10.7 million tons of steel,” 90 million people in China participated in steel production, accounting for one-fifth of the national labor force at the time. At the same time, millions of earth furnaces were built nationwide, but the result was deforestation, shortage of ironware, and depletion of labor, leaving a pile of scrap iron.
The current massive construction of artificial intelligence data centers in China is turning into another facade of progress with disappointing results.
According to the China Science and Technology Industry Think Tank “Jiazi Light Year,” in the first half of 2024, the total computing power of online smart centers in the country was 1.7 billion card hours, but the actual usage was only 560 million card hours, with an overall utilization rate of only 32%. Additionally, the average installation rate of computing infrastructure industry racks is less than 60%.
There are reports online suggesting that the current rental rate of data centers generally falls between 20-30%, with some enterprise-level smart centers having as low as 10% occupancy.
He Yun (pseudonym), who works in the artificial intelligence data center industry in mainland China, told Epoch Times, “The computing center is mostly used by some large model enterprises. Apart from DeepSeek, there are not many truly large model enterprises. So, overall, there is more supply than demand domestically. Demand comes from those large model companies, but the supply is more abundant due to government encouragement in establishing computing centers. Thus, there are too many computing centers being built.”
He Yun explained that the oversupply of data centers in China and declining profits are mainly due to weak demand. He analyzed several reasons for the subdued demand.
Firstly, the internet dividend has peaked. He Yun said, “How many people use WeChat? How many people use Douyin? How many people use Taobao? The population dividend has ended.”
Secondly, the overall economy in China is weak. He Yun stated, “Companies may be more cautious in IT expenditures. If they are cautious in IT spending, their cloud services, including digital transformation needs, would also be weak.”
China built over 200 new artificial intelligence data centers in 2024, but the occupancy rate is less than 20%. This is because they were not naturally developed based on actual demand but were established as performance projects for officials and profit tools for businessmen.
With the collapse of the real estate sector, authorities need to find new engines to drive economic development. According to “Jiazi Light Year,” with the rise of the artificial intelligence wave and the central government’s policy to compete with the US in technology, local officials are positioning smart centers as “new infrastructures” to boost the economy. Speculators tailor their pitch to the government, touting bright prospects for returns, securing initial investments and construction quotas.
Subsequently, speculators use these investments as startup funds to register various Special Purpose Vehicle (SPV) companies, applying for loans from banks. To obtain bank loans, many speculators with smart center construction quotas collude with various parties to create false lease agreements and successfully secure bank loans.
In order to report false results to the government, speculators have found another business for the smart centers – mining for digital currencies. However, mining causes significant equipment wear and tear on smart centers, potentially rendering them obsolete after only two years.
Another method for speculators to profit from data centers is in the procurement of equipment. According to “Jiazi Light Year,” SPV companies purchase large quantities of servers, parallel file storage systems, network equipment, etc., to set up smart centers. Numerous opportunities to line their pockets arise in this procurement process. For example, when purchasing servers, SPV companies may choose non-mainstream products or opt to buy only specific components to save a substantial amount of money, which then goes into their pockets.
For these speculators, the equipment performance of smart centers is not their priority. As long as they achieve arbitrage during the equipment procurement, their mission is considered accomplished.
Another method speculators use to profit from data centers is by obtaining government subsidies for green energy. In April 2024, the Xinjiang Development and Reform Commission issued a regulation stating that for a newly built large smart center, the government permits power generation companies to connect 400,000 kilowatts of photovoltaic or equivalent scale wind power for every 500PFlops. Grid connection means income.
These profit-making methods mirror those of speculators who used chips for profit several years ago.
According to reports from mainland media, from 2019 to 2020, nearly 20,000 companies shifted to “integrated circuits, chips, semiconductors.” These “transitional” chip companies originate from non-high-tech industries like construction, HR services, clothing, cement, etc. Their goal is to deceive funding – by just changing their operating scope to be related to integrated circuits, they can enjoy tax breaks or land resource benefits from local governments.
For instance, shareholders of Hebei Angyang Microelectronics Technology Co., Ltd admitted in court that they bought land at a discounted price, only constructed an office building, and did not build a chip factory or purchase any production equipment.
In this chip leap forward movement, numerous billion-dollar and even trillion-dollar chip projects have stalled, including the Wuhan Hongxin project claimed to have invested trillions.
In April 2020, Wuhan’s Development and Reform Commission released the “Wuhan Municipal Major Ongoing Projects Plan for 2020,” with the Wuhan Hongxin Semiconductor project ranking first with a total investment of 128 billion yuan. However, in July 2020, Wuhan Hongxin announced a broken funding chain. In February 2021, Wuhan Hongxin notified all staff of layoffs.