China is transitioning to local production of artificial intelligence chips.

The Chinese government has announced a regulation requiring any new data center projects that receive state funding to exclusively use domestic artificial intelligence chips. This development is considered 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 requested that data centers that are less than 30% completed remove all foreign chips or cancel their purchase plans. In more advanced projects, the situation will be evaluated on a case-by-case basis. This move highlights China's goal of achieving self-sufficiency in artificial intelligence chips amid decreasing trade tensions with Washington.

Advanced artificial intelligence chips, notably from Nvidia, have become one of the key points of contention between China and the United States. U.S. President Donald Trump announced in an interview following talks with Chinese President Xi Jinping last week that Washington would not allow the most advanced chip trade related to Nvidia.

Beijing's latest move seems to extinguish Nvidia's hopes of regaining its market share in China, while providing more chip sales opportunities to local competitors such as Huawei. There is no clear information on whether the regulation applies at the national level or only in certain provinces.

In addition to Nvidia, other foreign chip manufacturers like AMD and Intel also sell data center chips to China. Strong regulatory bodies such as the Cyberspace Administration of China and the National Development and Reform Commission have not commented 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 market share in the artificial intelligence chip sector in China has plummeted from 95% in 2022 to zero.

This regulation supporting domestic chip producers will allow China to gain more market share in the chipset market. Various Chinese companies, from large firms like Huawei to smaller players like Cambricon, aim to take advantage of this situation.

However, this move risks widening the gap in artificial intelligence computing power between the U.S. and China. U.S. tech giants have invested hundreds of billions of dollars to build data centers using Nvidia's most advanced chips. On the other hand, domestic chip manufacturers in China have been affected by U.S. sanctions, and their advanced chip production capacities have diminished.