NVIDIA, Chipmakers Brace For Impact As US Mulls New Chip Export Restrictions To China: Could This End AI Stock Rally?

The U.S. government is contemplating new restrictions on the export of AI chips to China in an effort to limit China’s technological advancements and contain its rising influence.

The ban, which may go into effect as soon as next month, would prevent Nvidia Corp. NVDA and other chipmakers from shipping their products to clients in China and other nations of concern without a license, according to a report published by the Wall Street Journal on Wednesday.

Premarket Reactions

Shares of U.S. chipmakers experienced steep declines in the premarket, with Nvidia Corp. down 3.5%, Advanced Micro Devices Inc. AMD down 3%, Marvell Technology, Inc. MRVL down 2.7% and ON Semiconductor Corp. ON down 1.9%.

Other large-cap semiconductor stocks were also in the red, with Broadcom Inc. AVGO down 1.2%, Intel Corp. INTC down 1.1%, ASML Holdings AMSL down 0.9% and Texas Instrument Inc. TXN down 0.8%.

Due to their significant exposure to semiconductors and chipmakers, the VanEck Semiconductor ETF SMH, Global X Robotics & Artificial Intelligence ETF BOTZ, and Pacer Data and Digital Revolution ETF TRFK are among the exchange traded fund predicted to see a volatile session on Wednesday.

Nvidia Underperforms Due to Its Larger Exposure To China

Just a month ago, Nvidia’s CEO, Jensen Huang, expressed concern about the “enormous damage” to the U.S. IT industry from the escalating dispute over chips between Washington and Beijing. “If [China] can’t buy from… the United States, they’ll just build it themselves,” he said.

Nvidia has a high exposure to China due to the fact that China and Hong Kong contributed about 25% or $7.1 billion to the chipmaker’s total sales in fiscal year 2022. An additional $8.5 billion in sales came from Taiwan, which is not subject to similar export restrictions but is nonetheless caught in the middle of the escalating tensions between the United States and China.

Read also: ‘There Is Only One China’: Nvidia Chief Flags Dangers To US Chips Act, Repercussions Of US Tech Embargo On China

Cloud Services Could Be The Next In Line

The U.S. government is beginning to view artificial intelligence from a national security perspective.

In addition to limits on the export of AI chips, the United States is considering limiting the leasing of cloud services to Chinese AI companies. Chinese AI companies have found the platforms offered by large cloud service providers like Amazon.com Inc. AMZN and Microsoft Corp. MSFT to be indispensable in the process of model training.

The proposed ban is meant to protect national security interests and address concerns about technology transfers.

A person familiar with the matter reached by the WSJ has said that while the administration has not yet decided when to implement the regulation, it is likely to wait until after Treasury Secretary Janet Yellen‘s trip to China in early July.

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