China is transitioning to domestic production in artificial intelligence chips.

The Chinese government has announced a regulation requiring any new data center projects that receive state funding to use only domestically produced artificial intelligence chips. This development is seen as one of the most aggressive steps in China's efforts to eliminate foreign technology from its critical infrastructure.

In recent weeks, Chinese regulatory authorities have asked data centers that are less than 30% complete to either remove all foreign chips or cancel their purchase plans. In projects at more advanced stages, situations will be assessed on a case-by-case basis. This move indicates that China aims for self-sufficiency in AI chips alongside the easing of trade tensions between Washington and Peking.

Nvidia, among others, has become one of the key points of contention in the competition between China and the U.S. Former U.S. President Donald Trump announced in an interview following discussions with Chinese President Xi Jinping last week that Washington would not permit the trade of the most advanced chips related to Nvidia.

Beijing's latest move appears to extinguish Nvidia's hopes of regaining market share in China, while providing more chip sales opportunities for local competitors like Huawei. There is no clear information on whether the regulation is applicable nationally or only in certain provinces.

In addition to Nvidia, other foreign chip manufacturers such as AMD and Intel also sell data center chips to China. Powerful regulatory bodies like the Chinese Cyberspace Administration and the National Development and Reform Commission have not made any comments on the issue.

Nvidia CEO Jensen Huang has continued to lobby U.S. officials for more artificial intelligence chip sales to China. However, Nvidia's share of the AI chip market in China fell from 95% in 2022 to zero.

This regulation supporting domestic chip manufacturers will enable China to gain more market share in the chipset market. Various Chinese firms, ranging from large companies like Huawei to smaller players like Cambricon, aim to benefit from this situation.

However, this move risks widening the gap between the U.S. and China in terms of AI computing power. U.S. technology giants have invested hundreds of billions of dollars to build data centers using Nvidia’s most advanced chips. Meanwhile, principled chip manufacturers in China have been affected by U.S. sanctions, leading to a decline in advanced chip production capacities.