* China condemns US threats of AI sanctions

* US alleges Moonshot copied AI technology

* Beijing warns of countermeasures if curbs introduced

(Adds context throughout)

By Eduardo Baptista

BEIJING, July 27 (Reuters) - China's commerce ministry on

Monday accused the United States of "AI hegemonism" and

threatened countermeasures after senior U.S. officials said

Chinese AI companies could face investigations, sanctions and

trade restrictions over the alleged theft of U.S. technology.

The ministry said Washington was threatening Chinese

companies with punishment based on allegations they used

"distillation" to copy advanced U.S. AI models, despite what it

called a lack of factual or legal grounds.

Model distillation is a widely used AI training technique in

which developers use the outputs of a more capable model to

train or improve another system. U.S. officials say they

distinguish between legitimate distillation and large-scale

extraction that amounts to intellectual property theft.

'ALL NECESSARY MEASURES'

"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 in a statement.

The comments mark an escalation in a dispute centred on

Beijing-based Moonshot AI, whose recently released Kimi K3 model

has drawn attention for its coding capabilities and intensified

debate in Washington over whether Chinese developers are copying

U.S. models or rapidly closing the technological gap through

their own research. The controversy echoes the reaction in the

U.S. to the rise of Chinese startup DeepSeek last year.

White House Office of Science and Technology Policy Director

Michael Kratsios said last week the U.S. government had

information indicating Moonshot distilled Anthropic's Claude

Fable 5 model to develop Kimi K3.

Kratsios alleged Moonshot had built a sophisticated internal

platform to conduct large-scale distillation of U.S. models and

switched between multiple methods of access to avoid detection.

He also alleged the company had acquired servers equipped with

Nvidia's ( NVDA ) GB300 chips and accessed such systems in Thailand,

likely to train its models.

U.S. Treasury Secretary Scott Bessent later warned that

Chinese companies could face financial sanctions or placement on

the Commerce Department's Entity List, which restricts access to

U.S. 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.

"When PRC (Chinese) firms conduct covert, industrial-scale

distillation attacks that cross the line into IP theft,

sanctions and Entity List designations will be on the table," he

said.

Moonshot has rejected suggestions that Kimi K3's performance

was achieved via distillation, telling China's National Business

Daily last week that its performance gains came from original

changes to underlying architecture.

Placement on the Entity List could severely restrict

Moonshot's access to U.S. semiconductors, software and cloud

services. The U.S. used the trade blacklist as a central part of

its campaign against Chinese telecommunications equipment maker

Huawei beginning in 2019.

Anthropic said in February it had identified more than 3.4

million interactions with its Claude models linked to Moonshot.

It said hundreds of fraudulent accounts were used to target

capabilities including reasoning, coding, data analysis, tool

use, computer vision and the operation of computers.