How Is China Changing the AI Game for Advisors?

The ongoing artificial intelligence race between the United States and China is no longer just about the uncanny evolution of Will Smith eating spaghetti, as designed by ChatGPT and its legions of competitors over the years.

It has global implications. First, there’s the balance of power, technological and economic, between the world’s two largest economies. Then there’s the risk of models going rogue and creating an existential threat to humanity, as industry leaders have acknowledged in recent weeks. Combined with the supersonic pace of the technology’s development, that creates daunting choices for financial advisors and their clients.

“China is a huge understated problem,” Heritage Financial president Paul Schatz said. “If the US is the Wild West, which it is, I can’t even articulate what China is going to do by allowing their AI to go rogue,” he added. “This probably leads to one of the grand market blowups by 2030.”

Like Warren G and Nate Dogg said: Regulate

The newest warnings about the threats posed by singularity, or the runaway advancement of AI that learns to self-improve beyond human comprehension, have prompted leaders in the market — OpenAI’s Sam Altman, Anthropic’s Dario Amodei and X’s Elon Musk — to call for swift regulation. While there is bipartisan support for rules to keep AI from advancing too quickly, Congress as a whole appears unprepared to act, which is a problem, Schatz said. “The risks are everywhere, which is why the rewards are potentially so incredible and can lead to huge boom-and-bust cycles.”

Presently, the US market has an advantage over China’s, with domestic AI models scoring better, said Jake Miller, co-founder and chief solutions officer at Opto Investments. “Every frontier model since 2023 has been American, and Chinese models trail by roughly seven months on average,” Miller said. “Seven months is a large gap in a field moving this fast, and it has not closed.”

But a challenge in the US is the resistance to data center construction, which he said is a real political issue but not much of a substantive one. In part, that’s because estimates of data centers’ water and energy consumption may be exaggerated, he said: 

• Data centers accounted for 1.5% of global electricity in 2024, he said. 
• “Google’s own measurement puts a median Gemini prompt at 0.24 watt-hours and 0.26 milliliters of water,” he said, “which means somewhere between 25,000 and 45,000 prompts use as much water as it takes to grow a single California almond.” 
• X recently reported removing about 200,000 accounts it suspected of being part of a Chinese influence operation that included messaging about data centers raising electricity bills, he said.

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The wave of AI companies heading toward the public equity markets also represents a risk, said Christian Francaviglia, wealth manager at Arena Private Wealth. “An IPO usually tells you two things: Private owners want liquidity, and the checks required have gotten too big for private markets to write on their own,” he said. “That isn’t bearish by itself, but I believe public investors are being asked to fund the next leg of the buildout, and public shareholders tend to be less patient than the last set of owners were.”

When it comes to AI investments and managing client expectations, Francaviglia starts by showing clients how much AI exposure they already have. “Most people are more concentrated than they realize once you count the index funds,” he said. “For most families, the right move isn’t a wholesale exit — it’s stopping the accumulation.”

Index and Chill a Little. Charles Failla, founder and chief executive of Sovereign Financial Group, is also essentially letting the diversification of the broad indexes handle AI exposure in client portfolios. “We’re not making an AI bet,” he said, adding that the biggest AI investing risk right now is concentration.

“Two of the three biggest tech IPOs ever could price within a few months of each other … That’s a lot of AI paper hitting the market at once, and if you own a total-market index fund, you’ll be buying it whether you meant to or not.”

That poses a more worrisome issue, at present, for advisors and their clients than international competition, some experts say.

“The China risk is overstated, and the concentration risk is real and has nothing to do with China, because a handful of names are a large share of the S&P 500 and their valuations assume capex earns a return,” said Miller, of Opto Investments. 

“The robustness of American capital markets can provide a durable unfair advantage to companies who can use that capital to maintain their lead,” he said.