China is intensifying its initiatives to promote the use of domestically produced artificial intelligence (AI) chips over advanced semiconductors from Nvidia, led by Jensen Huang. 

This strategy aims to strengthen the country's semiconductor sector and mitigate the impact of sanctions imposed by the United States, according to sources who spoke with Bloomberg.

In recent months, Beijing has issued informal recommendations urging Chinese firms to decrease their dependence on Nvidia’s H20 chips, which are extensively utilized in AI development.

While these recommendations do not constitute a formal ban, they are part of China’s larger goal to enhance its technological independence while carefully managing ongoing tensions with the U.S., insiders indicate.

This pressure reflects Beijing’s desire to boost the market presence of domestic chip manufacturers like Cambricon Technologies and Huawei, positioning them as competitive alternatives to foreign suppliers. This initiative comes amid rising concerns about potential additional restrictions on U.S. technology exports to China.

This approach follows earlier actions this year, where Chinese electric vehicle manufacturers were encouraged to procure more components from local sources, as the nation aims to lessen its reliance on foreign technologies.

Following these reports, shares of Nvidia, the leading chipmaker globally, dropped by as much as 3.9% on Friday. Despite ongoing trade restrictions, Nvidia's stock has surged over 100% this year, fueled by a significant increase in demand for its AI processors worldwide.

Although Beijing's guidance is non-binding, it is consistent with a broader industrial policy designed to protect China’s access to essential technologies. The U.S. government has already prohibited Nvidia from selling its most advanced AI chips to Chinese clients, compelling the company to adapt its products to meet export control regulations. The H20 line from Nvidia, tailored to comply with these requirements, remains a crucial asset in China’s AI landscape.

Beijing is still willing to permit companies to acquire foreign semiconductors when necessary to maintain competitiveness in the global AI landscape, despite the increasing emphasis on utilizing local chips, according to sources.

Nvidia's CEO Jensen Huang commented on the current situation, affirming the company's dedication to assisting its Chinese clients within the limits of US regulations. "We have numerous customers in China who rely on us, and we will strive to support them," Huang stated in a Bloomberg interview.

China is a crucial market for Nvidia, accounting for 12% of its total revenue in the July quarter, which translates to around $3.7 billion. However, CFO Colette Kress noted that trade restrictions have affected Nvidia's market presence in China, even though demand remains strong.

While Chinese semiconductor manufacturers are advancing, their AI processors still do not match the capabilities of Nvidia's products. Beijing has invested billions in subsidies to boost domestic semiconductor development, yet the technological disparity continues to pose a challenge.

Nonetheless, China's AI industry is thriving. Major technology firms like ByteDance and Alibaba, along with numerous emerging startups, are heavily investing in AI advancements.

In spite of regulatory pressures, some Chinese firms are quietly acquiring Nvidia chips, preparing for potential further US sanctions by the end of the year, while also increasing their purchases of domestic alternatives to comply with Beijing's policies.