China threatens retaliation over US AI theft allegations

China vows retaliation over AI sanctions threat

China's commerce ministry accused the United States of "AI hegemonism" and threatened countermeasures after senior US officials warned that Chinese AI companies could face investigations, sanctions, and trade restrictions over alleged intellectual property theft.

The ministry statement, released Monday, rejected US allegations that Chinese firms used "distillation" techniques to copy advanced American AI models without factual or legal basis. "For any action that causes substantive harm to Chinese interests, China will take all necessary measures to firmly safeguard its legitimate rights and interests," a ministry spokesperson said.

The Moonshot AI controversy

The escalating dispute centers on Beijing-based Moonshot AI, whose recently released Kimi K3 model has drawn attention for its coding capabilities. White House Office of Science and Technology Policy Director Michael Kratsios said last week the US government has information indicating Moonshot distilled Anthropic's Claude Fable 5 model to develop Kimi K3.

Kratsios alleged Moonshot built a sophisticated internal platform to conduct large-scale distillation of US models and switched between multiple access methods to avoid detection. He also claimed the company acquired servers equipped with Nvidia's GB300 chips and accessed systems in Thailand, likely for model training.

Moonshot has rejected the allegations, telling China's National Business Daily that Kimi K3's performance gains came from original changes to underlying architecture rather than distillation.

What's at stake

US Treasury Secretary Scott Bessent warned that Chinese companies could face financial sanctions or placement on the Commerce Department's Entity List, which restricts access to US technology. "We support open-source AI and the innovation it unlocks. But open source is not open season on American IP," Bessent wrote on social media platform X.

Entity List placement could severely restrict Moonshot's access to US semiconductors, software, and cloud services. The US previously used the trade blacklist as a central tool in its campaign against Chinese telecommunications equipment maker Huawei beginning in 2019.

Anthropic reported in February it had identified more than 3.4 million interactions with its Claude models linked to Moonshot, saying hundreds of fraudulent accounts targeted capabilities including reasoning, coding, data analysis, and computer vision.

Why it matters

The dispute reflects deepening tensions over AI development between the world's two largest economies. US officials distinguish between legitimate model distillation—a widely used AI training technique—and large-scale extraction they consider intellectual property theft. The controversy echoes Washington's reaction to Chinese startup DeepSeek's rapid progress last year and signals that AI technology transfer will remain a flashpoint in US-China relations. How this dispute resolves could set precedents for enforcement actions against other Chinese AI companies and shape the boundaries of acceptable AI development practices globally.

These details were first reported by Reuters correspondent Eduardo Baptista.