EXCLUSIVE-US orders chip equipment companies to halt some shipments to China's No. 2 chipmaker Hua Hong

SMIC, China's largest contract chipmaker, is the only domestic company that can currently make chips with 7-nm technologies, the report said. The letters from the Commerce Department also aim to prevent shipments to Huali, sources said.

The U.S. Department ‌of Commerce ​last week ordered multiple chip equipment companies to halt certain tool shipments to China's second-largest chipmaker, Hua Hong, its latest action to slow the country's development of advanced chips, according to two people familiar with the matter. The department sent letters to at least a handful of companies informing them of the new restrictions on tools and other materials destined for two Hua Hong ‌facilities that U.S. officials believe may make China's most sophisticated chips, the people said. Top U.S. chip equipment companies Lam Research, Applied Materials and KLA, each of which has significant business supplying China, were among those believed to have received a letter, the sources added.

China hopes the U.S. will take concrete actions to maintain the stability and smooth functioning of global industrial and supply chains, foreign ministry spokesperson Lin Jian said on Wednesday, when asked about the ban at a daily press conference. Reuters exclusively reported in March that Hua Hong ‌Group had developed advanced chip manufacturing technologies that could be used to produce artificial intelligence chips, a milestone in Beijing's efforts to boost tech self-sufficiency. The group's contract chipmaking business, Huali Microelectronics, was preparing a 7-nanometer chipmaking process at its Shanghai plant, sources ‌said. SMIC, China's largest contract chipmaker, is the only domestic company that can currently make chips with 7-nm technologies, the report said.

The letters from the Commerce Department also aim to prevent shipments to Huali, sources said. Shares of Lam Research closed down 3.1% on Tuesday, while KLA fell 4.7% and Applied Materials fell 5.8%.

Shares of Hua Hong semiconductor fell 4.29% in Shanghai on Wednesday. U.S. AIMS TO PROTECT LEAD ON AI CHIPS In recent years, the Commerce Department has restricted U.S. companies from shipping equipment to Chinese factories producing advanced chips as part of an effort to safeguard the U.S.' technological lead in making AI and ⁠other advanced chips ​on national security grounds.

The recent letters carry this policy forward, but ⁠could increase tension with China ahead of President Donald Trump's scheduled meeting with Chinese President Xi Jinping in Beijing in May. U.S. chip equipment companies and other suppliers could lose billions of dollars in sales, one of the people said, especially if they were supplying a chipmaking plant that is under construction, or one ⁠that is retooling to begin making more advanced chips. The restrictions could slow China's domestic chipmaking drive, though Hua Hong may be able to replace the tools with ones from foreign or Chinese companies.

A Commerce Department spokesperson declined to comment. Hua Hong did not immediately respond to a ​request for comment. Lam Research, Applied Materials and KLA did not immediately respond to requests for comment. "This is an overdue and welcome first step from the Trump administration," said Chris McGuire, a senior fellow for China and emerging technologies at ⁠the Council on Foreign Relations. "But to have any effect, it must capture all shipments from U.S. toolmakers, including from their overseas subsidiaries."

It can be difficult to pinpoint which factories produce advanced chips. The two Hua Hong facilities targeted by the Commerce Department are Fab 6, which the Huali Microelectronics website says has 28/22-nm technology ⁠and ​is in Shanghai; and 8a, which does not appear on the company website. Sources said it is believed to be under construction.

China's tech giant Huawei Technologies, which is on a U.S. trade blacklist, has been collaborating with Hua Hong and is planning to move part of its AI chip production from SMIC to Hua Hong, other sources said. Huali's research and development of 7-nm chips at its Hua Hong Fab 6 site began last year with support from Huawei-backed SiCarrier, Reuters reported last month. ⁠Huali is planning an initial production capacity of a few thousand 7-nm wafers a month by the end of 2026, Reuters reported. Huawei did not immediately respond to a request for comment. Nor did SMIC. The Commerce Department communication - known as an "is-informed" ⁠letter - allows the U.S. to bypass lengthy rule-writing processes to quickly impose ⁠new licensing requirements on specific companies. In 2022, for example, the Commerce Department sent is-informed letters to Nvidia and AMD restricting their ability to export top AI-related chips to China, and to chip equipment makers Lam Research, Applied Materials and KLA to restrict shipments to advanced facilities in China. The restrictions in those letters later became rules that apply to more companies.

Under the Trump ‌administration, the letters have been used fairly often, ‌but the restrictions in them have not always become regulations.