Microsoft CEO Satya Nadella has criticized the business practices of leading artificial intelligence developers, arguing that frontier AI companies are applying a double standard by relying on publicly available data to train their models while restricting others from using distillation techniques to build competing systems.

In a post on X on Sunday, Nadella questioned what he described as an imbalance in the AI ecosystem, where model developers benefit from broad access to public information but seek to prevent others from learning from their models.

“While the great innovation that comes from model providers having fair use rights to train models on public data is needed, I find it ironic that the status quo is to then turn around and impose restrictive terms on distillation, and to reserve the right to learn from customer usage and interaction data,” Nadella wrote.

He added that if “learning only flows in one direction,” the companies controlling AI infrastructure would capture most of the economic value while the creators of the underlying knowledge receive little in return.

Although Nadella did not name any company, his remarks appeared to target Anthropic, which has been among the most vocal critics of model distillation. Distillation is a technique that enables developers to train smaller or cheaper AI models using the outputs of more advanced systems, significantly reducing the time and computing resources required to build competitive models.

The comments come amid escalating tensions between major AI developers over intellectual property, data usage and competition, as governments in the United States and China tighten scrutiny of frontier AI technologies.

Anthropic has repeatedly argued that unrestricted distillation threatens innovation by allowing competitors to replicate years of research at a fraction of the cost. In February, the company said distillation enables rivals to acquire “powerful capabilities from other labs in a fraction of the time, and at a fraction of the cost, that it would take to develop them independently.”

The debate intensified last month when Anthropic accused Alibaba of carrying out what it described as “the largest known distillation attack” against the company to date in a letter sent to U.S. lawmakers. Anthropic alleged that Chinese firms had attempted to extract capabilities from its Claude models, though Alibaba did not publicly respond to the accusations.

Nadella’s criticism also touches on a broader legal and ethical dispute surrounding how frontier AI models are developed. Companies including Anthropic, OpenAI and Google DeepMind train their systems using vast amounts of publicly available text, images and other online content. That practice has triggered numerous copyright lawsuits from publishers, authors, artists, and media organizations, who argue that their work has been used without permission or compensation.

Microsoft itself has largely avoided positioning Azure as a developer of proprietary frontier models, instead emphasizing its role as an infrastructure provider. Since OpenAI ended Microsoft’s exclusive cloud hosting arrangement earlier this year, the company has increasingly adopted a more model-agnostic strategy, supporting a growing portfolio of AI models through Azure AI Foundry, including offerings from OpenAI, Meta, Mistral, xAI, DeepSeek and other developers.

Nadella’s latest comments reinforce that strategy by encouraging enterprises to reduce dependence on any single AI model provider.

He argued that businesses should own their AI infrastructure, retain control over their proprietary knowledge and establish independent evaluation and learning systems instead of relying entirely on external foundation models.

According to Nadella, organizations should build their own “learning loop,” allowing AI systems to continuously improve using enterprise-specific knowledge while maintaining strict control over sensitive data.

“That is why enterprises need a real trust boundary for their human capital and token capital to compound,” he wrote. “And it is a hard boundary across which nothing crosses, not even the intelligence exhaust, without consent.”

His reference to “intelligence exhaust” reflects growing concerns among enterprise customers that prompts, usage patterns, and model interactions could become valuable training data for AI providers. While major AI companies maintain enterprise privacy commitments, businesses continue to seek stronger guarantees that proprietary information will not be used to improve third-party models.

The issue has become more important as corporations deploy generative AI across software development, legal services, finance and healthcare, where sensitive commercial data represents a key competitive asset.

Nadella’s comments also echo criticism from other industry leaders. Palantir CEO Alex Karp recently criticized the industry’s “tokenmaxxing” business model, arguing that enterprises should control their own compute infrastructure, models and data rather than depend on external AI providers. Elon Musk has similarly accused Anthropic of using copyrighted material to train its models while opposing the use of distillation by competitors.

The dispute highlights a growing divide within the AI industry over who ultimately owns the value generated by artificial intelligence. Frontier model developers believe that restricting distillation is necessary to protect billions of dollars invested in research and computing infrastructure. Infrastructure providers and enterprise customers contend that organizations deploying AI should retain ownership of the data, workflows, and institutional knowledge they generate while using these systems.

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China’s economy is expected to have lost momentum in the second quarter as soft consumer spending, weak private investment and a prolonged property downturn outweighed the benefits of resilient exports, bolstering expectations that Beijing will roll out additional fiscal support in the second half of the year.

A Reuters poll of 54 economists forecasts that China’s gross domestic product (GDP) expanded 4.5% year-on-year in the April-June quarter, slowing from 5.0% in the first quarter. If confirmed, the figure would place growth at the lower end of the government’s 4.5%-5.0% annual target and underscore the increasingly uneven nature of China’s post-pandemic recovery.

The slowdown comes even as exports have remained surprisingly resilient, supported by robust global demand for AI-related products, front-loaded shipments to the United States ahead of possible new tariffs, and aggressive pricing by Chinese manufacturers. However, economists say the export boom has failed to generate a broad-based recovery in domestic demand, leaving policymakers with the challenge of reviving household confidence while managing structural weaknesses in the economy.

Exports Remain The Economy’s Main Growth Engine

China’s external sector has continued to outperform expectations this year, helping offset weakness at home.

Exports due to be released on Tuesday are expected to show another solid expansion in June, although at a slower pace than in previous months. Manufacturers have accelerated shipments to the United States before the possible introduction of additional tariffs, while Chinese technology companies have benefited from sustained global demand for artificial intelligence infrastructure, electronics and related manufacturing.

Competitive pricing has also enabled Chinese exporters to gain market share as consumers worldwide remain sensitive to higher living costs. The strength of exports has helped stabilize industrial production, particularly in sectors linked to semiconductors, electronics, electric vehicles and advanced manufacturing.

Yet economists caution that export-led growth alone cannot sustain the broader economy.

Domestic Demand Remains China’s Biggest Weakness

The principal drag on growth continues to be domestic demand. Consumer spending has remained subdued despite government efforts to stimulate household consumption through subsidy programmes and targeted support measures.

Private investment has also weakened as businesses remain cautious about expanding capacity amid uncertain demand and ongoing weakness in the property sector. China continues to face a pronounced supply-demand imbalance, with factories producing more goods than domestic consumers are willing or able to purchase.

That imbalance has contributed to persistent disinflationary pressures and raised concerns about excess industrial capacity across several manufacturing industries.

Analysts at Goldman Sachs said the composition of China’s growth has become increasingly uneven.

“Growth has become more uneven: exports continue to support headline activity, but domestic demand has softened notably,” Goldman Sachs analysts wrote.

“Moreover, the boost from exports has not translated into a stronger labor market or meaningful profit improvement, limiting the pass-through from external demand to domestic growth.”

The labor market remains a particular concern because subdued hiring and wage growth continue to weigh on household confidence and discretionary spending.

Property Downturn Continues To Weigh On Confidence

China’s real estate sector remains one of the largest obstacles to a stronger recovery. Years of declining home sales, falling property prices, and financial stress among developers have reduced household wealth and dampened consumer sentiment.

Since real estate has historically accounted for a significant share of household assets and local government revenues, the prolonged downturn continues to affect consumption, investment, and fiscal conditions across much of the country.

While Beijing has introduced targeted measures to stabilize the housing market, analysts say the sector has yet to establish a durable recovery.

Quarterly Growth Also Expected To Moderate

On a sequential basis, China’s economy is also expected to have slowed. Economists forecast quarter-on-quarter GDP growth of 0.9% during April through June, down from 1.3% in the first quarter.

The moderation suggests the economy lost momentum after benefiting from policy support and stronger exports earlier in the year.

China’s National Bureau of Statistics will release second-quarter GDP alongside June retail sales, industrial production, and fixed-asset investment data on July 15, providing investors with a comprehensive snapshot of the economy’s performance.

Investors are now focusing on a Politburo meeting expected later this month, where China’s top leadership is expected to determine economic policy priorities for the remainder of the year.

Most economists expect Beijing to introduce additional fiscal measures rather than aggressive monetary easing. The government has already set a budget deficit target of around 4% of GDP for 2026, one of the highest in recent years, and plans significant government bond issuance to finance infrastructure investment and other growth-supporting programmes.

Analysts believe authorities will accelerate spending during the second half of the year after much of the initial policy support was front-loaded earlier in 2026.

Capital Economics expects fiscal policy to become the primary driver of growth.

“China’s growth should pick up over the second half of this year as fiscal support ramps up,” the consultancy said.

“But domestic overcapacity will remain entrenched, leaving China’s economy reliant on exports for growth.”

Unlike fiscal policy, monetary policy is expected to remain relatively restrained. Economists surveyed by Reuters expect the People’s Bank of China to leave its benchmark seven-day reverse repo rate unchanged throughout the remainder of 2026.

They also expect the weighted average reserve requirement ratio (RRR) to remain steady through the third quarter before a possible 20-basis-point reduction during the fourth quarter.

The central bank has maintained policy rates and reserve requirements unchanged since May 2025, instead relying on short-term liquidity operations to ensure adequate funding conditions while continuing reforms to its monetary policy framework.

Analysts say policymakers have greater flexibility to support growth through fiscal spending than through interest-rate cuts, particularly given concerns about financial stability and capital outflows.

Inflation Remains Subdued

China’s inflation environment remains markedly different from that of many advanced economies.

Reuters’ poll projects consumer prices will rise 1.2% this year, well below the government’s target of around 2%. Inflation is expected to remain at approximately 1.2% in 2027, reflecting persistent weak domestic demand and excess manufacturing capacity.

The subdued inflation outlook gives Beijing room to maintain accommodative economic policies if growth weakens further.

Looking beyond the current quarter, economists expect China’s growth to stabilize modestly before gradually slowing over the coming years. The Reuters survey forecasts GDP growth of 4.6% in the third quarter before easing to 4.5% in the fourth quarter.

For the full year, China’s economy is expected to expand 4.6% in 2026, down from 5.0% in 2025, before slowing further to 4.4% in 2027.

The projections highlight the structural challenges facing the world’s second-largest economy.

While China’s export sector continues to benefit from its dominant position in global manufacturing and growing demand for AI-related products, sustainable long-term growth will ultimately depend on reviving domestic consumption, restoring confidence in the property market and encouraging stronger private-sector investment.