The AI arms race between Washington and Beijing just entered a new, messier chapter. China warned on July 27 that it will take all necessary measures to protect its AI companies and national interests if the US follows through on threatened sanctions, calling American allegations of intellectual property theft “baseless smears.”
The threat came six days after US Treasury Secretary Scott Bessent put Chinese AI labs on notice, saying the Trump administration would closely monitor open-source AI models from Chinese companies for signs of what he called “industrial-scale distillation” of American AI models.
The model at the center of the storm
The specific flashpoint is Kimi K3, a 2.8-trillion-parameter model built by Moonshot AI. US officials are scrutinizing whether K3 improperly extracted capabilities from Anthropic’s Fable 5 model, one of the most advanced AI systems produced by a US company.
Kimi K3 reportedly rivals certain top-tier American AI models in performance while being significantly cheaper to run. If those capabilities were genuinely distilled from a US model rather than independently developed, it would represent a massive shortcut, one that undermines the billions of dollars US companies have poured into research.
