Train travel west of Beijing for two hours drops you into Inner Mongolia, a dry province defined by grasslands and ancient cinder cones. This region, historically known for sheep farming and coal mining, has become the primary location for new AI data centers in China.
The city of Ulanqab has seen nearly 100 data centers open or start construction since 2016. Local Chinese firms have promised a combined capacity of 12.5 gigawatts, with over 70 percent of those commitments announced in the last year alone. A research note from Goldman Sachs describes this as one of the fastest growing compute clusters in Asia. For context, OpenAI‘s Stargate Project is expected to reach a total capacity of just 10 gigawatts when finished.
Companies are moving to Ulanqab for three main reasons. The city sits high on the Inner Mongolian Plateau and experiences long, cold winters, reducing the energy needed for cooling. Its proximity to Beijing allows for fast data transmission to the country’s most populated areas. The biggest draw is cost. Electricity is cheaper here than almost anywhere else in China, driven by strong growth in wind and solar power alongside abundant coal supplies.
Another shift is who is building these facilities. Chinese AI firms are investing directly in their own infrastructure instead of renting compute from cloud providers. DeepSeek, ByteDance, Alibaba, and Xiaohongshu are reportedly building massive centers in Ulanqab. For years, these companies spent far less on physical infrastructure than their American counterparts despite developing capable models. The boom in Ulanqab suggests they are finally catching up.
There is one major problem: water. Ulanqab receives roughly 14 inches of rain annually, making it as dry as Denver. The local government is already struggling to meet resident demand before the new projects are fully operational. Last month, the local water company shut off several waterworks for seven hours each night to manage peak usage. While data centers require less water in winter, the new infrastructure adds a significant environmental challenge to the region.
The Boonies
Inner Mongolia has been a data center hub for at least a decade, before the current AI boom. Huawei built its first center in Ulanqab in 2016, followed by Apple three years later. In 2021, the area was designated as a main hub for the government project “Eastern Data, Western Compute,” which aimed to build data centers in China’s Western hinterlands.
A major drawback existed. Because these facilities were far from China’s populous eastern coast, they faced high latency rates when transferring data to most users. They were initially used mainly for backup storage until AI gave them a new purpose. Andrew Stokols, a professor at Singapore Management University who studies China’s compute infrastructure, notes that the rise of AI in 2022 changed this. He says remote data centers could be well-utilized for model training. A training run for an AI model can take months and does not require much real-time tinkering, so latency is less of an issue.
Relatively speaking, Ulanqab is not that far away. Inner Mongolia is much closer to Beijing and other major metropolitan areas than any Western data center hub. It is now connected by two dedicated fiber optics cables built in 2017 and 2019. These reduced average latency speeds to less than five milliseconds, which is fast enough to support real-time data exchanges like AI inference.
Compared to other data center hubs in China, Ulanqab’s growth seems driven more by commercial demand than government investment, Stokols says. As Chinese AI startups like DeepSeek, Moonshot AI, and Zhiput AI have attracted more paying users, they found a viable business case for inference data centers close enough to serve them without excessive latency.
Powered by Renewables
The Chinese government is excited about building data centers in Inner Mongolia for another reason. It could help absorb the country’s excess capacity of renewable energy. Damien Ma, director of Carnegie China, a Singapore-based research center, says there is a positive correlation between regions in China with the most unused renewable energy and those that have built the most data centers.
For the government, this is a win-win strategy. China can catch up to the pace of data center construction in the US while simultaneously increasing demand for renewable energy. It is no surprise that Envision, one of the largest Chinese manufacturers of wind turbines, announced this month it will build a 2 gigawatt AI data center in Ulanqab connected directly to the company’s own clean power supply.
Experts caution that viewing AI data centers and renewable energy in China as a perfect match is too simple. Stokols found in his research that about 37 percent of electricity in Ulanqab still comes from coal. Since data centers need to run around the clock, operators have traditionally favored fossil fuels for their reliability.
“Inner Mongolia has long been the West Virginia of China. It’s a coal country,” Ma says. The region is now racing to replace coal with wind and solar, but it remains unclear how fast that transition will happen or how far it will go. For now, the data centers popping up in China’s remote highlands will have to keep relying on coal to some extent. But “in three years, maybe it will be completely powered by renewables,” Ma says.
