China’s Moonshot, Z.AI, and DeepSeek are challenging U.S. AI labs—and beating them on cost

It was, perhaps, the worst-kept secret in the AI community.

In mid-July, online sleuths who obsessively track the internet for signs of new AI models started to whisper about the latest offering from Moonshot AI, the Beijing-based artificial intelligence startup behind the Kimi large language model: Something big was coming.

Moonshot AI’s latest model didn’t just live up to the hype—it raised the stakes.

On July 16, Moonshot debuted Kimi K3, the largest open-source model ever released, and promised it could perform close to the level of Anthropic’s Fable 5—perhaps the most powerful publicly available model on the market today—at a fraction of the cost. Moonshot’s official benchmarks consistently rank K3 among the top three AI models; one independent benchmark from Arena.AI even pegged K3 as the best model currently available, ahead of Anthropic.

The launch was a triumph for the lab and its founder Yang Zhilin, a 34-year-old Tsinghua and Carnegie Mellon alumnus—and Pink Floyd fan—who based his startup’s Chinese name on his favorite album, The Dark Side of the Moon.

But the release also rattled investors because it challenged the idea that U.S. firms could maintain their sizable lead in the global AI race simply by outspending Chinese rivals on computing power.

Markets sold off in Asia. The chip-focused Philadelphia Semiconductor Index fell 1.6%. Nvidia lost almost $600 billion in value and briefly lost its spot as the world’s most valuable company to Apple.

Many observers, including Anthropic CEO Dario Amodei, hadn’t expected a Chinese AI lab to release a model that could approach the U.S.’s best offerings for at least another six months. Tesla CEO Elon Musk suggested it might happen by the first quarter of next year. Kimi K3 blew up the timeline: Chinese AI is now cheap enough and good enough that even U.S. startups and Fortune 500 companies are quietly plugging the models into their operations to rein in spiraling AI budgets. It’s a remarkable closing of the gap that China achieved despite Washington imposing export controls to choke off China’s access to the world’s most advanced chips.

“The AI ecosystem in China is probably much better than people thought,” says Paul Triolo, a partner at DGA–Albright Stonebridge Group.

Chinese developers have been working from a severe disadvantage for years.

The U.S. began to cut China off from top-tier AI processors, like those made by Nvidia, in 2022. By limiting the sale of the advanced chips used to train and run AI models—and the........

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