CNBC's The China Connection newsletter: A U.S.-China debate that's becoming bigger than tariffs

Beijing is increasingly using its AI capabilities to build foreign influence. U.S. President Donald Trump said he will discuss AI with Chinese President Xi Jinping in September. New, open-source Chinese AI model releases still reflect U.S. constraints on computing power.

U.S. and Chinese companies have come to dominate the global artificial intelligence race.

Hi, this is Evelyn, writing to you from Beijing. Welcome to the latest edition of The China Connection — a snapshot of what I'm seeing and hearing from local businesses. As Chinese startups build new artificial intelligence models and more American startups use them, they're raising the stakes for U.S.-China relations.

The big story China's role in AI is transforming rapidly. President Xi Jinping's AI speech on July 17 and the coinciding release of Claude Fable 5 rival Kimi K3 were just a start. The flurry of U.S. government pushback on Chinese open-source models ignited calls against "premature restrictions" in an open letter Friday from Nvidia's Jensen Huang and more than 20 other tech companies.

"To me, the release of Kimi K3 has kicked off a hornet's debate in Washington about what to do about Chinese open-weight models," said Ryan Fedasiuk, fellow at the American Enterprise Institute. The debate will soon be tested at a high level. In remarks late last week about a U.S. data center policy , U.S. President Donald Trump said he plans to discuss AI with Xi during a visit to the U.S. in late September. China's foreign ministry responded by saying Beijing was ready to work with the U.S. on AI .

Whether the two countries end up being more collaborative — or adversarial — on the technology will be "very consequential," said Lex Zhao, a Chinese-born venture capitalist who oversees $150 million in assets as a Boston-based managing partner at One Way Ventures. "The reality is that a lot of American startups use Chinese AI models," he said. "A lot of companies we invest in build on top of these models." Zhao believes the U.S. and China each hold "a lot of leverage" over the other, limiting what actions they will take on AI. Such commercial interdependence is turning a technology challenge for Washington into a diplomatic one.

This month, China not only hosted its World AI Conference in Shanghai but also the APEC Digital Weeks in Chengdu , where nearly two dozen senior tech officials gathered — including from the U.S. George Chen, partner and chair of digital practice at consultancy The Asia Group, attended both events. "Now Beijing also views AI as a new kind of diplomacy to grab more allies and partners," he said, adding that the coming Trump-Xi summit in Washington, D.C., in September will be the first time the two leaders can address AI diplomacy matters.

Overwhelming demand China's tech advances have come despite four years of U.S. restrictions on access to advanced semiconductors for training AI. Excitement over powerful new models is still constrained by computing power. Earlier this month, AI consultant Shu Weibing said he visited Z.ai's offices, only to find a three-month waitlist for companies wanting to use the startup's most advanced GLM 5.2 coding tools released in mid-June. Z.ai did not respond to a request for comment. And just a few days after Moonshot launched Kimi K3, the startup said it was pausing new subscriptions due to computing power limits. China is pouring resources into domestic computing capabilities. Z.ai is ramping up a giant 1-gigawatt data center, a source familiar with the matter confirmed to CNBC. But the pace of Chinese AI releases, even as of ...