In a move to strengthen its semiconductor industry and counter U.S. sanctions, Beijing is reportedly encouraging Chinese firms to prioritize locally produced artificial intelligence (AI) chips over those from Nvidia Corp. NVDA.

What Happened: Chinese regulators are discouraging companies from purchasing Nvidia’s H20 chips, which are utilized for developing and operating AI models.

This policy, more of a guidance than a strict prohibition, is designed to avoid stifling local AI startups and exacerbating US-China tensions.

The initiative is aimed at bolstering domestic Chinese AI chipmakers, such as Cambricon Technologies Corp. and Huawei Technologies Co., by helping them capture a larger market share and equipping local tech firms for potential additional US restrictions. Earlier this year, Beijing also promoted local electric-vehicle manufacturers to source more supplies from domestic chipmakers, reports Bloomberg.

Following this development, Nvidia shares dipped by up to 3.9% to $119.26 on Friday. In 2022, the US government had prohibited Nvidia from selling its most advanced AI processors to Chinese customers, in an attempt to curb Beijing’s technological progress.

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Chinese regulators, including the Ministry of Industry and Information Technology, issued directives to minimize the use of Nvidia, urging companies to depend on domestic vendors like Huawei and Cambricon. Nevertheless, Beijing will continue to allow the procurement of foreign semiconductors over domestic alternatives if necessary for local firms to build the best possible AI systems.

Nvidia chose not to comment on the issue. The company’s CEO, Jensen Huang, stated that they are striving to serve customers in China while adhering to US government restrictions.

Why It Matters: This move by Beijing is a clear indication of its intent to bolster its domestic semiconductor industry and reduce reliance on foreign technology.

By encouraging local firms to opt for domestic AI chips, China is not only supporting its local chipmakers but also preparing for any potential escalation in US restrictions.

This development is a crucial part of the ongoing tech war between the U.S. and China, with both nations striving to gain technological supremacy.

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This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.