SHANGHAI (Reuters)

China's semiconductor index surged near a three-year high on Monday, driven by predictions that a U.S. order halting Taiwan Semiconductor Manufacturing Co (TSMC) shipments could accelerate Beijing’s self-reliance in chips.

TSMC Shipment Suspension

Starting Monday, TSMC will suspend shipments of certain advanced chips to select Chinese clients following a letter from the U.S. Department of Commerce enforcing export restrictions on these products.

Analysts suggest that while this move may inflict short-term challenges on Chinese firms focused on artificial intelligence (AI) and graphics chips, it could favor the domestic chip sector as firms will have limited alternatives.

The CSI Semiconductor Index surged over 6% during Monday's trading, reaching its highest level since December 20, 2021. The CSI Integrated Circuits Index also climbed by 5%. Shares of SMIC, China's largest foundry and the main alternative to TSMC, rose more than 4%.

Strategic Implications

Cinda Securities noted that in the medium to long term, this situation would necessitate supply chain reorganization, boost demand for domestic advanced chip production capabilities, and drive technological advancements in semiconductor equipment and materials.

In recent years, several Chinese tech firms have sought to design their own advanced processors in light of U.S. sanctions against Huawei Technologies and restrictions on companies like Nvidia and AMD.

To produce chips, many Chinese firms depend on TSMC, the leading global contract chipmaker, which reported that 11% of its revenue came from China in the third quarter.

U.S. Export Restrictions

The U.S. has imposed export restrictions on TSMC chips with 7-nanometer or more advanced designs. Currently, the only Chinese foundry capable of manufacturing chips at the 7 nm node is SMIC, known for aiding Huawei with chips for its advanced smartphones, such as the Mate 60 and Pura 70.

SMIC has produced these advanced chips using equipment acquired from ASML (Netherlands) and Applied Materials (U.S.) before U.S. sanctions were enacted. However, production ramp-up has been hampered by U.S. export controls that restrict the acquisition of advanced manufacturing equipment, with domestic alternatives still not fully developed.

Recent reports indicated that due to manufacturing limitations, SMIC prioritized AI chip production for Huawei over smartphone chips, considering the former's strategic significance.