China vows countermeasures over US AI distillation sanctions threat

China's Ministry of Commerce on Monday accused the United States of "AI hegemonism" and warned it would take "all necessary measures" to safeguard its interests if Washington follows through on threats to sanction Chinese artificial intelligence companies over allegations of intellectual property theft through model distillation.reuters+2

The Accusation

The sharp response came five days after the White House leveled its most specific allegation yet against a Chinese AI developer. On July 22, Michael Kratsios, director of the White House Office of Science and Technology Policy, publicly accused Moonshot AI of conducting "large-scale, covert industrial distillation" of Anthropic's Fable 5 model to build its Kimi K3 system. Hours later, Treasury Secretary Scott Bessent warned that "sanctions and Entity List designations will be on the table" for Chinese firms engaged in covert, industrial-scale distillation that crosses into IP theft.yenisafak+3

Bessent said on the social media platform X that the administration had found "watermarks of our U.S. large language models on many of the Chinese models," calling the practice unacceptable. He drew a distinction between legitimate open-source development and what he characterized as theft: "We support open-source AI and the innovation it unlocks. But open source is not open season on American IP".qz+1

Beijing Pushes Back

China's commerce ministry dismissed the US accusations as lacking factual basis and legal support, calling them a "smear campaign" against the achievements of China's AI industry. The ministry urged Washington to pursue dialogue and cooperation on AI governance rather than unilateral restrictions.money.usnews+2

Beijing also turned the argument around, with the New Straits Times reporting that China's ministry said US firms themselves train AI models on Chinese examples. The ministry's statement said: "For any action that causes substantive harm to Chinese interests, China will take all necessary measures to firmly safeguard its legitimate and lawful rights and interests".nst+1

A Wider Technology Confrontation

The dispute arrives amid an escalating technology confrontation between the two countries. The Trump administration has been assembling a multi-pronged strategy to restrict US adoption of Chinese AI models through Entity List designations, cybersecurity advisories, procurement rules, and corporate liability frameworks, according to Axios Alphabet Inc. ↗ 2.70% reporting cited by multiple outlets. Separately, Kratsios alleged that Moonshot had accessed Nvidia ↘ 5.21% GB300 chips — banned from export to China — through servers in Thailand.mlq+2

Kimi K3's open weights were scheduled for public release on July 27, the same day as Beijing's response, a timeline that gives the administration a narrow window to act before the model becomes freely downloadable. Neither side has published forensic evidence to settle the distillation question; as one analysis noted, "the calendar is the only fact both sides agree on".metirai+2