China turns to domestic AI chips, looks to cut dependence on US firms

China has included some domestic artificial intelligence (AI) chips on its official procurement list for the first time as the country seeks to cut dependence on foreign supplies, according to a report by the Financial Times. The report comes even as the Trump administration allowed chip giant Nvidia to supply its advanced H200 chips to some approved customers in China.

 

According to the report, the Ministry of Industry and Information Technology added AI processors from Huawei and Cambricon to its government-approved list of suppliers. The move was aimed at enhancing the use of domestic semiconductors in the country's public sector. Increased procurement from the government could translate into a billion-dollar sales opportunity for local chipmakers.

 

Why is China increasing dependence on local chips?

China's move to start sourcing chips from domestic firms comes as Beijing looks to reduce dependence on foreign supplies, especially the United States (US), after increased scrutiny and trade restrictions.

 

According to the report, China has also taken efforts to replace microprocessors manufactured by AMD and Intel, and Microsoft’s operating system Windows, in the last few years.

 

The move has led to the gradual phasing out of foreign technology products in China’s public institutions, such as government offices, schools and hospitals, as well as state-owned companies.  ALSO READ | How cars, batteries and low-cost goods shaped China's $1tn trade surplus

US moving away from China

The shift, however, is a two-way street. The US, which is using all its might to stay ahead of China in the AI race, is withholding information and enforcing broad export controls on advanced chips to limit China’s technological progress.

 

At the same time, the US is reducing its reliance on China by diversifying its supply chains not only in the AI and technology sectors but across multiple industries. This gradual move away from China is expected to benefit several developing markets, including India.

 

A December 3 study by the US think tank Information Technology and Innovation Foundation (ITIF) noted that as American companies shift their supply chains out of China, India has become a key destination, particularly for technology-related operations.

 

India produces more than 800,000 engineering graduates every year, almost six times the number in the US, and accounts for more than 20 per cent of the global semiconductor design workforce.

China-US on-and-off trade war

Relations between the US and China have remained fragile over the year, with both countries engaging in tariff wars. In April this year, Trump sharply raised tariffs, beginning with a 10 per cent baseline duty on all imports and a 34 per cent tariff specifically on Chinese goods, while ending duty-free access for small Chinese shipments.

 

China retaliated by imposing the same 34 per cent tariff, introducing export restrictions, and banning selected US farm products. This resulted in a rapid escalation, with tariffs climbing to 84 per cent and then 125 per cent within days.

 

Following weeks of rising tensions, both sides agreed in May to a 90-day pause on tariff increases, significantly reducing duties. Negotiations continued through July and August, during which the US pressed China to resume large-scale purchases of soybeans. On August 11, the two countries extended their tariff truce for another 90 days.