Chinese government advises domestic companies to avoid purchasing Nvidia chips.

Beijing is stepping up pressure on Chinese companies to buy locally produced artificial intelligence chips instead of Nvidia Corp products, part of the nation's effort to expand its semiconductor industry and counter US sanctions. Chinese regulators have been discouraging companies from purchasing Nvidia's H20 chips, which are used to develop and run AI models. The policy has taken the form of guidance rather than an outright ban, as Beijing wants to avoid handicapping its own AI start-ups and escalating tensions with the US. The move is designed to help domestic Chinese AI chipmakers gain more market share while preparing local tech companies for any potential additional US restrictions.

In recent months, several Chinese regulators, including the powerful Ministry of Industry and Information Technology, issued so-called window guidance — instructions without the force of law — to reduce the use of Nvidia. The notice was aimed at encouraging companies to rely on domestic vendors like Huawei Technologies Co and Cambricon Technologies Corp. Beijing also amplified the message via a local trade group. At the same time, Chinese officials want local companies to build the best AI systems possible, and if that means they need to buy some foreign semiconductors over domestic alternatives, Beijing would still tolerate that.

The US government banned Nvidia from selling its most advanced AI processors to Chinese customers in 2022, part of an attempt to limit Beijing's technological advances. Nvidia modified subsequent versions of the chips so they could be sold under US Department of Commerce regulations, with the H20 line fitting that criteria. When asked about the situation, Nvidia chief executive officer Jensen Huang said: "The first thing we have to do is comply with whatever policies and regulations that are being imposed. And, meanwhile, do the best we can to compete in the markets that we serve. We have a lot of customers there that depend on us, and we'll do our best to support them."

Nvidia, the world's most valuable chipmaker, continues to benefit substantially from China despite restrictions. In the July quarter, the firm got 12 percent of its revenue, or about US$3.7 billion, from the country, including Hong Kong, up more than 30 percent from a year earlier. During an earnings call, Nvidia chief financial officer Colette Kress stated: "Our data center revenue in China grew sequentially in Q2 and is a significant contributor to our data center revenue. As a percentage of total data center revenue, it remains below levels seen prior to the imposition of export controls. We continue to expect the China market to be very competitive going forward."

Chinese chip designers and manufacturers are working to introduce alternatives to Nvidia, with Beijing having offered billions in subsidies to the semiconductor sector. China's burgeoning AI sector includes major players like ByteDance Ltd and Alibaba Group Holding Ltd, along with six so-called tigers developing large language models: 01.AI, Baichuan, Moonshot, MiniMax, Stepfun and Zhipu. However, some companies are turning a blind eye to the Chinese decree to avoid H20 chips and rushing to buy more before an anticipated sanction from the US by the end of this year, while also buying homemade Huawei chips to please Beijing.