China has urged companies not to use Nvidia chips. How will this affect their exports?

Chinese authorities have advised local companies not to use Nvidia's H20 artificial intelligence processors, especially in projects related to government and national security. The move calls into question Nvidia's revenue recovery in the Chinese market, as well as the Donald Trump administration's hopes of boosting US revenue by resuming chip shipments to the PRC. On the other hand, it reflects Beijing's desire to develop its own semiconductor technologies, limiting its dependence on Western solutions.

China has urged local companies to avoid using Nvidia H20 processors, especially for projects related to government agencies, Bloomberg writes, citing sources. In recent weeks, Chinese authorities have sent notices to a number of companies recommending them to avoid using these lower-performance chips (they are a simplified version of Nvidia's leading processors, created specifically for the Chinese market, taking into account U.S. export requirements), especially in any government or national security-related projects, both in the public sector and in private companies, the agency said.

In their letters, Chinese agencies asked the companies questions such as why they chose H20 over domestic analogs, whether it was really necessary given the availability of local solutions, and whether security issues had been identified in Nvidia's hardware. In parallel, state media began to express doubts about the reliability and security of H20. Beijing directly voiced these claims to Nvidia, but the company repeatedly denied the vulnerabilities, Bloomberg notes.

In addition to Nvidia, Advanced Micro Devices' (AMD) AI gas pedals are also subject to the restrictions, one of the agency's interlocutors said. Nvidia told Bloomberg that H20 is not a military product and is not intended for the public sector, and China has enough of its own chips for such purposes. AMD declined to comment to the agency.

Shares of Chinese developer of chips for AI Cambricon Technologies after Bloomberg's publication jumped by the maximum allowable for the day 20%. Shares of other companies in the sector also rose, including Semiconductor Manufacturing International Corp - by 5%.

Beijing's concerns are twofold: first, authorities are worried about the possibility of location tracking or remote shutdown features in Nvidia's chips, which the company denies.

Secondly, Beijing is focused on the development of its own semiconductor technologies and wants Chinese companies to reject Western chips in favor of local solutions. At the same time, China has so far refrained from a direct ban on H20, Bloomberg noted.

China's strict restrictions now apply only to sensitive areas, similar to the way it previously restricted the use of Tesla cars and iPhones in certain institutions, as well as Micron chips in critical infrastructure, Bloomberg notes. However, according to the publication's knowledgeable source, Beijing may extend stricter guidelines on Nvidia and AMD products to a wider range of areas, although such discussions are at an early stage.

The China decision complicates Nvidia's attempts to recoup billions of dollars in lost revenue in China after the Trump administration lifted a de facto U.S. ban on such sales, Bloomberg noted. Investors had hoped the company would be able to strengthen its position in the Chinese market after Nvidia and AMD's deal with Washington came to light. They will be allowed to resume sales to China of their specialized AI chips on the condition that 15% of the proceeds from these shipments will be transferred to the U.S. government.

Beijing's stance may prevent Donald Trump from implementing his plan to turn export controls into a source of revenue for the U.S. budget, Bloomberg believes. By authorizing the resumption of sales just a few months after the actual ban, the Trump administration has demonstrated its pragmatic, "transactional" approach to national security issues previously considered untouchable, the agency said.

Now Nvidia and AMD customers in the People's Republic of China are under pressure from Beijing not to make such purchases. But Chinese companies may not yet be ready to fully switch to local semiconductors, Bloomberg noted.

"Domestic chips are improving markedly in quality, but they may not be as versatile for certain tasks that the Chinese AI industry plans to focus on," said Homin Lee, senior macro strategist at Lombard Odier's Singapore unit. He added that he expects "strong" demand for the chips, which the Trump administration has authorized Nvidia and AMD to sell.

"Beijing seems to be using regulatory uncertainty to form a dependent market of sufficient scale to absorb Huawei's products, while leaving the possibility of H20 procurement to meet real needs. This suggests that domestic counterparts are still insufficient, even despite China's pressure on foreign suppliers," said RAND AI researcher Lennart Heim.

Nvidia's H20 chip has less processing power than the company's top-end solutions, but its high memory bandwidth is well suited for the inference phase of AI development, when models recognize patterns and make inferences, Bloomberg notes. That makes it in demand from Chinese companies such as Alibaba Group and Tencent Holdings, especially as leading domestic chip maker Huawei struggles to produce enough advanced components to meet demand.

The Trump administration wants to ease restrictions on chip exports also in an effort to keep China's AI ecosystem dependent on less advanced U.S. technology for as long as possible, thus depriving Huawei of revenue and technical expertise that the company could gain from having a wider range of customers, Bloomberg writes.

The Biden administration, which considered but never imposed restrictions on H20 sales, estimated that losing access to that Nvidia chip would have made the inferencing process 3 to 6 times more expensive for Chinese companies when dealing with advanced AI models, the agency wrote.

This article was AI-translated and verified by a human editor