China chip index nears 3-year high amid US ban on TSMC chips

China’s semiconductor index jumped to a near three-year high on Monday amid bets that a U.S. order halting TSMC’s supply of advanced chips to Chinese customers could accelerate Beijing’s self-sufficiency efforts, Reuters reported. UNN.

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TSMC will reportedly suspend the supply of some sophisticated chips to some Chinese customers from Monday after receiving a letter from the US Department of Commerce imposing export restrictions on the products.

Analysts said that while the move could lead to some short-term problems for Chinese firms involved in the development of chips for artificial intelligence accelerators and graphics processors, it could benefit the domestic chip sector as companies would have few alternatives.

The CSI Semiconductor Index jumped more than 6% in Monday trading to its highest since Dec. 20, 2021, while the CSI Integrated Circuits Index rose 5%. Shares of SMIC, China’s largest foundry and the country’s main alternative to TSMC, rose more than 4%.

“In the medium to long term, this will force a reorganization of the supply chain, increase demand for domestic advanced manufacturing capacity and promote technological breakthroughs in semiconductor equipment and materials,” Chinese brokerage Cinda Securities said in a note published on Sunday.

Several Chinese technology firms and chip makers have struggled in recent years to develop their own advanced processors after the US imposed sanctions on Huawei Technologies and banned companies such as Nvidia and AMD from selling their most sophisticated chips to China.

Many rely on Taiwan’s TSMC, the world’s leading contract chip maker, for manufacturing. In the third quarter, 11% of TSMC’s sales came from China, the company said.

The US has imposed restrictions on the export of TSMC chips with 7-nanometer or more advanced designs, Reuters reports.

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The only foundry in China capable of producing chips using the 7nm process is SMIC, which is known for helping Huawei produce the chips used in its latest smartphones, including the Mate 60 and Pura 70.

Analysts say SMIC makes such advanced chips using equipment supplied by companies such as ASML of the Netherlands and Applied Materials of the United States, which it managed to accumulate before the US sanctions took effect.

However, SMIC has faced difficulties in ramping up production due to US export controls that prevent it from purchasing the equipment needed for advanced chip production, while domestic alternatives are still ready to do so, the paper said.

In February, Reuters reported that due to production constraints, SMIC had to prioritize making AI chips for Huawei over smartphone chips, as the former is considered more strategically important.

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