By John Liu, CNN

(CNN) — In a surprising reversal of the United States’ years-long technology restrictions on China, President Donald Trump last month allowed Nvidia to resume sales of a key AI chip designed specifically for the Chinese market.

Yet rather than celebrating, Beijing’s response has been noticeably lukewarm, despite having long urged Washington to ease the stringent export controls. In the weeks since the policy U-turn, Beijing has called the chip a security risk, summoned Nvidia for explanations and discouraged its companies from using it.

The less-than-welcoming sentiment reflects Beijing’s drive to build a self-sufficient semiconductor supply chain – and its confidence in the progress its rapidly advancing chip industry has made.

But the cold shoulder may also represent some political posturing. Despite significant advances in its semiconductor sector, China still needs America’s chips and technology. Experts said China’s national champion Huawei has developed chips with performance comparable to — and in some cases surpassing — the newly approved Nvidia chip. However, China still wants the more advanced AI processors that remain blocked under US export controls.

In the years since Trump first imposed tech restrictions on Huawei during his first term, China’s chip technology has made significant strides, spurred by the frustration that mounted as Washington piled on export controls, said Xiang Ligang, director-general of a Beijing-based technology industry group and an advisor to the Ministry of Industry and Information Technology.

“We have this capability, it’s not as they imagine – that if China is blocked, China won’t be able to function, or that China will be finished,” he said.

To him, the policy about-face only reflects the importance of having a wholly homegrown chip supply chain.

“For Chinese companies, we may only have one choice if we wish to ensure a relatively secure supply of chips – that means relying on our own domestically produced chips,” Xiang said.

That may be China’s goal, but in the high-stakes AI race, with all its national security implications, the US remains the leader, at least for now.

China is not “naive”

The chip in focus is Nvidia’s H20, which was released by the AI chip leader last year to maintain access to the Chinese market following strict export controls put in place under the Biden administration that stopped the export of chips with high processing power.

Last month, Trump greenlit the sales of the chip to China after banning it in April as the US trade frictions with China deepened.

Trump has justified his decision by calling the chip “obsolete,” as it lags behind the company’s cutting-edge AI processors like Blackwell or H100, from which H20 is derived. He and his officials appeared to have embraced a view long promoted by Nvidia’s CEO Jensen Huang – that US can maintain its tech leadership only through ensuring its chips remain the global standard.

“You want to sell the Chinese enough that their developers get addicted to the American technology stack,” Commerce Secretary Howard Lutnick said last month.

But the dramatic reversal has fueled questions about Trump’s transactional approach to national security – once considered off-limits to bargaining.

China, on the other hand, is alarmed by the alleged security risks of Nvidia’s H20s like “tracking and positioning” and “remote shutdown” features, capabilities that some US lawmakers have called for but Nvidia denies it has placed in its chips.

China’s cyberspace watchdog and industry ministry have since summoned the American chip giant over the security concerns and urged firms to avoid H20 chips, a development which was previously reported by Bloomberg.

One major Chinese tech company which has developed its AI models has received notice from the authorities urging it to exercise caution in the use of H20s, and advising it not to purchase them, a company insider said on the condition of anonymity.

CNN has reached out to the ministry and the cyberspace authorities for comment.

An Nvidia spokesperson told CNN that NVIDIA “does not have ‘backdoors’ in our chips that would give anyone a remote way to access or control them.”

“Banning the sale of H20 in China would only harm US economic and technology leadership with zero national security benefit,” the spokesperson added.

But China believes the US isn’t playing fairly, Xiang said.

“What we actually want, you refuse to sell us. For the things you already consider obsolete, you still want to dump them into our market and occupy our market. Do you really think we’re that naive?” he said.

Still coveted

Despite Beijing’s concerns and the H20’s reduced performance, the chips remain highly sought after by Chinese companies.

Equity research firm Bernstein estimated that shipment of the chips to China this year would have reached 1.5 million units, or about 23 billion in revenue, without Trump’s export restrictions. Major buyers include Chinese tech giants such as TikTok owner ByteDance, Alibaba and Tencent.

While Huawei’s top AI chips excel in computing power – one of the key measures in evaluating processors’ performance – in comparison with H20, they fall short in terms of memory bandwidth, which determines how much data can move between a chip’s memory and computing unit.

That bandwidth depends on a technology known as High Bandwidth Memory (HBM) used in AI chips to ensure efficient data transmission in AI model training.

China’s top HBM maker CXMT, or ChangXin Memory Technologies, is still about three to four years behind industry leaders like South Korea’s SK Hynix and Samsung, and American Micron, according to MS Hwang, research director at Counterpoint Research, a research firm.

Last year, the Biden administration further tightened export controls on China, including restrictions on HBM sales, forcing Chinese companies to rely on existing stockpiles.

Beijing has requested Washington to lift restrictions on HBM as part of the trade deal negotiations, Financial Times reported this week.

Key appeal of H20 for Chinese companies also lies in Huawei’s limited production capacity and Nvidia’s well-established ecosystem, said Qingyuan Lin, senior analyst at Bernstein focusing China’s semiconductor industry.

“Even when you want to completely replace the H20 demand with the local guys, they’re not able to deliver the amount of chips that’s needed,” he said.

The supply bottlenecks stem from constraints in scaling up production of both the manufacturing of computing units of the AI chips and the integration of various components in them, a technology known as advanced packaging in the industry, Lin said.

Bernstein estimated that Huawei’s shipments of its advanced AI chips in 2025 would amount to around 700,000 units, still far short of the demand in the country.

CNN has reached out to Huawei for comment.

Meanwhile, Nvidia’s powerful ecosystem, which integrates its chips with its software platform, has created what experts call a “moat,” making it difficult and costly for AI developers who train models on its software to switch to alternatives.

“The H20 comes with a complete ecosystem covering both hardware and software support, ensuring better compatibility and ease of integration,” said Brady Wang, associate director at Counterpoint. “This ecosystem maturity is still a challenge for many Chinese-developed chips, making the H20 more attractive despite its cost disadvantage.”

‘Very close’

Still, experts said China’s rapid progress in semiconductor technology should not be underestimated. Years of tightening export controls have injected both urgency and opportunity into Beijing’s push for self-sufficiency, Lin said.

While chipmaking technology appeared to stall after Huawei’s 2023 flagship smartphone showcased advanced chips that American officials had deemed extremely difficult to produce, domestic chipmaking equipment companies have been steadily gaining ground, he said.

“The local guys actually had very little chance to gain share from the global players because of the technology gap, but export controls created a market that didn’t exist before and accelerated the domestic substitution,” he said.

Bernstein projects that the percentage of homemade AI chips in China will surge from 17% in 2023 to 55% by 2027, while American suppliers like Nvidia and AMD will shrink to 45% from 83%.

In April, Huang of Nvidia met with Trump in Washington, urging the administration to loosen export controls on chips and saying that the diffusion of American AI technology around the world needs to be accelerated.

“There’s no question that Huawei is one of the most formidable technology companies in the world…they made enormous progress in the last several years,” he said.

“China is right behind us. We’re very, very close.”

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CNN’s Hassan Tayir and Fred He contributed reporting.