China, Nvidia & Your 401(k)

You don’t have to be part of the tinfoil-hat brigade to see that China’s anti-trust investigation into Nvidia is politically motivated. President Xi owes his rise to, and hold on, power to deftly wielded corruption lawfare. True to form, the investigation was announced hours before Treasury Secretary Scott Bessent announced a “framework” for kicking the TikTok can down the road a little further. It also coincides with US-China trade talks that, to hear Beijing tell it, led to the violations in the first place.

As part of its acquisition deal with Israel-based Mellanox Technologies, Nvidia pledged “uninterrupted” chips supply to Chinese markets, which proved impossible under spastic US export controls. Its all diplomatic bluster, sure, but this time Beijing is going after the source of the chips rather than Washington’s regulation of them.

What’s behind the shift?

Given that Beijing has long called for domestic “chip independence” from the US or anyone else, the move shouldn’t be a head scratcher. Beneath the public calls, however, lies the (relatively) open secret that the Chinese Communist Party (CCP) has been  scrambling to gets its hands on any high-end Nvidia chip they could find - mostly for the use by the army. Essentially, scorning something in public and still buying it in private, like when parents get all political about Disney or Chik-fil-A. No matter what else is being signaled, if the CCP and its army are still scrambling to get their hands on Nvidia’s top-tier chips, they’ll succeed. With the lively secondary market for controlled chips in Middle East, to name just one prickly source, there simply isn’t much that the US can do about it.

If we’ve learned anything from Russian energy sanctions and the ghost fleet deployed to evade them, it’s that:

1)the black market is global and vastly scalable, and

2) it is operating beyond the reach of the trade wars and

3) it is profitable enough to spawn a huge black market reinsurance market. Not so much insurance against pirates, but for them.

In short, the CCP can get what it needs, even if it is forcing domestic firms like Huawei, Alibaba and Baidu to spur domestic production.

Why would Beijing hobble its own tech sector?

It wouldn’t be the first time Xi has cracked down on tech, and to the CCP the move makes a degree of sense. The baseline assumption in capitalist societies is that vigorous businesses and markets are, by default, a positive strength to the government. Communists see strong markets as a rival to central planning and power, and therefore a threat to government. The CCP sees this less as knee-capping domestic tech, but simply maintaining its edge over Chinese society.

Then there is the very real and disturbing possibility that China doesn’t need those chips as much as we like to think that they do. Now that some of the shine is coming off AI, it looks like the technology isn’t replicating humans as fast as the hype had suggested. What AI is doing terrifyingly well is replicating itself. Call it the DeepSeek effect: The model famously used OpenAI to replicate itself using a different configuration of chips. (Yes, I know I’m broad-stroking it here.)

Last year’s numbers alone are staggering: Chinese researchers filed some 35,423 AI patents - about 10x that to the US. Admittedly, the US is better at inventing new technologies, but the Chinese have an undeniable knack for creating novel uses for existing tech. With the US government slashing funding to universities hasn’t helped the trend of Chinese-born researchers to repatriate to China where Beijing will throw money at them.

So a question worth asking is: How close is China to not needing those H20 chips?

Looking at the global market, they may be closer than we think.

TSMC decided long ago to focus on manufacturing chips, not designing them - and that specialization elevated the company to the best in the business. Nvidia focused solely on design, and together they’ve taken over the semi-conductor universe. But nothing lasts forever. Tech companies run on so much hype that they are always jumping the gun on announcements on how they’ll take over and ruin your life, so take this with a grain of salt. Yet there has been a lot of talk this year by firms - OpenAI to name one – designing their own, in-house chips.

Understand that Nvidia, the first $4 trn company, isn’t going anywhere for a generation or so. Anything that big is stable. Its market cap accounts for about 8% of the S&P500, and anything that lopsided is not. So the perception that Nvidia is getting close to peaking is going to have a cascading effect on its share price, the whole outsized tech sector, and then keep rolling downhill at the rest of us. As the second largest computing market, Beijing may have decided that even if the Chinese chip-design isn’t there yet, it may be worth the gamble to use deviously-timed lawfare and trade barriers to trigger questions into the future rise of the world’s most expensive company. It doesn’t have to bankrupt Nvidia to do this, only burst the perception of unlimited growth.

A full scale retreat is wildly unlikely. They generally are until they aren’t. If it does happen … it’s not going to do anyones portfolio any favors.