China is keeping pace in AI while spending a fraction of what the US does, which is bad news for American companies footing the research bill.

• China trains its AI models by learning from the answers of existing US models — essentially copying the homework for cheap.
• This trick, called distillation, skips the billions spent teaching a model from scratch.
• The US pays for the hardest research, then China compresses the results into smaller, cheaper models.
• China gives these models away for free (open source), so anyone can download them.
• In effect, every dollar of US AI spending helps fund China's AI industry.

Outlook: Expect China to keep closing the gap cheaply as long as US labs lead the expensive frontier research.