China’s top internet regulator, the Cyberspace Administration of China, has asked the country’s leading tech firms, like Bytedance and Baidu, to stop testing Nvidia’s RTX Pro 6000D, reports the Financial Times citing unnamed sources with knowledge of the matter. The chipmaker’s shares dropped 2.5% in early trading on Wednesday. 

But as Nvidia’s stock dipped, Chinese tech stocks surged, as investors grew more bullish on the country’s ability to push the envelope on both AI software and semiconductor manufacturing. 

The Hang Seng Tech Index, which tracks major technology companies traded in the Chinese city of Hong Kong, rose by 4.2% on Wednesday, lifting the index to its highest point in four years. The Tech Index is up by 45% so far this year.

A new China headache for Nvidia

The RTX Pro 6000D, launched in July, was Nvidia’s latest effort to design a chip for the Chinese market that complies with U.S. export controls. Since 2022, Nvidia has been barred from selling its most advanced products to Chinese companies, forcing the chipmaker to design new chips that can legally be sold in the world’s second-largest economy. Washington has routinely tightened its controls, forcing Nvidia to design new export control-compliant products. 

In the meantime, Chinese chip designers like Huawei and Cambricon have started to catch up. Domestic processors, even if they lag behind Nvidia’s top-of-the-line products, may now compare favorably to what the U.S.-based chipmaker is allowed to sell in China. 

Nvidia is aware of the risk. In its recent earnings filing, the company warned that it “may be unable to create a competitive product for China’s data center market that receives approval from the [U.S.] government,” which would mean getting shut out of China’s data center market. 

The U.S. government may also be realizing that Nvidia has competition. Officials have pointed to the need to keep Chinese companies hooked on U.S. chips as one reason for granting export licenses for the H20, the China-focused chip that Nvidia already had in full production. 

Last quarter, Nvidia reported $2.8 billion in sales to customers that use China as a billing location, down from $3.7 billion a year ago. That number did not include any H20 sales. 

Nvidia also dropped China sales from its forward guidance, citing geopolitical uncertainty. Still, CFO Collette Kress suggested that the company could report as much as $5 billion in Chinese sales if it was permitted to sell the H20. 

Huang has also previously expressed hopes that the company might be able to make a China-focused version of its Blackwell processor. 

But now, Nvidia’s problems are not just with the U.S. government. Beijing is pressuring the company on multiple fronts.

Officials have encouraged companies, particularly those that work closely with the government, to stop using Nvidia chips. Also, Beijing has demanded Nvidia executives explain suggestions by U.S. officials that the chipmaker could include location-tracking in its products to combat chip smuggling. (Nvidia routinely denies that it includes such designs in its chips).

Over the weekend, Chinese officials announced that Nvidia had violated its antitrust law, by failing to comply with provisions agreed in exchange for approval of the chipmaker’s 2020 acquisition of Mellanox Technologies, an Israeli-U.S. networking equipment manufacturer. China has used antitrust investigations to express its displeasure with U.S. policy on trade and export controls.

On Wednesday, Nvidia CEO Jensen Huang said he was “patient” about the status of talks between the U.S. and China. “I’m disappointed with what I see. But they have larger agendas to work out, between China and the U.S, and I’m understanding of that,” Huang told reporters in London. 

Still, Huang reiterated that Nvidia will “continue to be supportive of the Chinese government and Chinese companies as they wish.”

Chinese tech optimism

Investors, on the other hand, are much more bullish on Chinese tech stocks. 

Baidu shares jumped by 15.8% in Hong Kong after several analysts released optimistic reports about the tech company, citing its cloud business, its latest reasoning model, and its reported progress in designing its own AI chips. 

Alibaba shares also rose by 5.3% in Hong Kong trading on Wednesday, bringing its year-to-date gains to 98.8%. The Chinese e-commerce giant is also benefiting from AI hype, thanks to its open-source Qwen models. 

Like Baidu, Alibaba is working on its own AI chips. On Tuesday, Chinese state media reported that China Unicom, a telecommunications company, had agreed to use Alibaba’s AI chips in one of its data centers.

Semiconductor Manufacturing International Corporation, China’s largest semiconductor company and manufacturer of Huawei’s Ascend AI chips, rose by 7.1% on Wednesday.

Separately on Wednesday, the Financial Times reported that SMIC is testing a locally-made deep-ultraviolet lithography machine, used to make advanced chips. As of now, Chinese companies have needed to rely on imported machinery from ASML, yet purchases are increasingly constrained under U.S. export controls.