China’s New Chip Rule Is a Declaration of War on US Tech Dominance

'Whole Nation' approach: China has new chip rule; Chipmakers to source material locally

China just dropped a bombshell that could reshape the global semiconductor industry for decades.

Under a sweeping new **China chip rule**, all domestic chipmakers must now source **at least 50% of their fabrication equipment from Chinese suppliers**—a figure expected to rise to 100% in the coming years. Announced as part of President Xi Jinping’s “Whole Nation” tech strategy, this policy is a direct response to U.S. export restrictions that have choked China’s access to advanced lithography tools from ASML, Applied Materials, and Lam Research .

But this isn’t just damage control. It’s a declaration of technological sovereignty—a high-stakes bet that China can build a fully independent chip ecosystem, from raw silicon to cutting-edge AI processors, without a single American or Dutch component.

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What the New China Chip Rule Actually Says

Issued by China’s Ministry of Industry and Information Technology (MIIT), the mandate requires all semiconductor fabs operating in China—both state-owned and private—to ensure that **no less than 50% of their capital equipment** (including etchers, deposition tools, and inspection systems) are procured from domestic vendors by the end of 2025 .

Key details:

  • Flexibility for advanced nodes: Fabs producing chips below 7nm may temporarily exceed the 50% foreign threshold—but must submit annual roadmaps for localization.
  • Heavy subsidies: Companies that exceed 70% local sourcing will receive tax breaks, low-interest loans, and priority in government R&D grants.
  • Penalties for non-compliance: Repeated violations could lead to revoked operating licenses or exclusion from national projects like the China Integrated Circuit Industry Investment Fund (“Big Fund III”) .

The ‘Whole Nation’ Approach Explained

First articulated by Xi Jinping in 2022, the “Whole Nation System” (举国体制) is China’s wartime-style mobilization model for critical technologies. It funnels state capital, talent, and policy support into strategic sectors—much like the U.S. did with the Manhattan Project or Apollo Program .

In semiconductors, this means:

  • Over **$150 billion** committed via state funds since 2014
  • Top scientists recalled from abroad under “Thousand Talents” programs
  • Universities restructured to prioritize microelectronics engineering
  • Local governments competing to build “chip valleys” with full subsidies

The new **China chip rule** is the enforcement mechanism—turning ambition into accountability.

Why the US Export Bans Triggered This Move

Since 2019, the U.S. has progressively tightened export controls on semiconductor tech to China:

  • 2019: Huawei blacklisted
  • 2022: Ban on advanced AI chips (NVIDIA A100/H100)
  • 2023: Restrictions on chipmaking equipment to Chinese fabs
  • 2024: “Foreign Direct Product Rule” extended to Chinese memory makers

The final straw came in late 2024, when the U.S. pressured the Netherlands and Japan to block even mid-tier DUV lithography tools. For China, it was clear: **no amount of diplomacy would restore access**. The only path was self-reliance .

Can China Really Go 100% Domestic?

Short answer: not yet for cutting-edge logic chips. But for mature nodes (28nm and above)—which power 80% of global electronics—progress is real.

Domestic champions are rising:

  • SMEE (Shanghai Micro): Developing DUV lithography tools (target: 28nm by 2026)
  • NAURA & AMEC: Etching and deposition tools now used in SMIC’s 14nm lines
  • Kingstone Technology: Local photoresist and wafer suppliers scaling rapidly

According to SEMI, China’s domestic equipment adoption rose from 16% in 2020 to **32% in 2024**—and the new rule will accelerate that to 50%+ by 2026 .

Impact on Global Semiconductor Giants

Companies like Applied Materials, Lam Research, and Tokyo Electron now face a stark choice: lose China—a market that accounted for **35% of their revenue**—or risk U.S. sanctions by setting up local JVs .

Some are navigating carefully:

  • ASML continues selling older DUV tools under U.S. license
  • Lam is expanding its China service center (but not new sales)
  • Many are shifting focus to India, Vietnam, and Mexico

But long-term, China’s closed loop could render them irrelevant in the world’s largest electronics manufacturing base.

Winners and Losers in China’s New Ecosystem

Winners:

  • Chinese equipment makers (NAURA, AMEC, Piotech)
  • Domestic foundries (SMIC, Hua Hong)
  • Chinese chip designers (HiSilicon, UNISOC)

Losers:

  • U.S. and Dutch equipment vendors
  • Multinational fabless companies reliant on Chinese manufacturing
  • Global supply chains built on seamless tech flow

What This Means for the Global Tech Race

We’re entering an era of **“splinternet” for hardware**. Two parallel semiconductor ecosystems will emerge:

  1. The U.S.-led alliance: Cutting-edge, globally integrated, but geopolitically fragile.
  2. The China-led bloc: Slightly behind in logic, but self-sufficient and rapidly catching up in memory and power chips.

For consumers, this could mean higher costs, fragmented standards, and delayed innovation. For nations, it’s a wake-up call to secure their own tech sovereignty—see India’s $10B PLI scheme or the EU Chips Act .

Conclusion: An Iron Curtain for Chips

The new **China chip rule** isn’t just policy—it’s a point of no return. By mandating local sourcing, Beijing has accepted that technological decoupling is inevitable and chosen to win on its own terms.

The world may have hoped for cooperation in the semiconductor age. But as this rule shows, the future will be built in silos—and China is pouring the concrete faster than anyone expected.

For deeper insights, explore our analysis on how the chip war is redrawing global tech alliances.

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