WASHINGTON – US chipmaker Nvidia suffered its worst share price fall in more than two months after the Biden administration stepped up efforts to keep advanced chips out of China, a campaign that includes restricting the company’s sale of processors designed specifically for the Chinese market.

Nvidia warned that the new rules, announced on Tuesday, could hinder product development and cause other difficulties, though the changes are not likely to take a financial toll in the short term.

It noted that the rules impose additional licensing requirements not just on exports to China, but also countries such as Saudi Arabia, the United Arab Emirates and Vietnam.

It said it had no assurance that the United States government will grant exceptions or licences or “will act on the request in a timely manner”.

Nvidia may also have to “transition certain operations out of one or more of the identified countries”, it said in a filing on Tuesday.

The latest regulations limit exports to two Chinese artificial intelligence (AI) chip firms that are seen as rivals to US-based Nvidia.

The rules – aimed at preventing China from accessing cutting-edge technology with military uses – cast a cloud over Nvidia shares and other US chip stocks.

Nvidia fell 4.7 per cent to US$439.38 in New York, marking the biggest single-day drop since Aug 9. The stock had more than tripled in 2023 before the pullback, fuelled by the AI boom.

Morgan Stanley cut its price target for Nvidia shares because of what it called “draconian” export controls.

Asian stocks related to AI chips fell after the official US announcement.

The company makes the most popular AI accelerators, processors that help sophisticated algorithms handle massive amounts of data.

The tighter controls will target Nvidia’s A800 and H800 chips, a senior US official said, which the company created for export to China – the world’s largest market for chips – after the Biden administration introduced its initial restrictions in October 2022.

Nvidia said that the restrictions “may impact the company’s ability to complete development of products in a timely manner, support existing customers of covered products, or supply customers of covered products outside the impacted regions”.

As part of the new rules, the Biden administration added two Chinese AI chip start-ups – Shanghai Biren Intelligent Technology and Moore Threads Intelligent Technology Beijing – and their subsidiaries to a trade restriction list. It mandates that companies obtain a US government licence before shipping to those firms.

Bloomberg Intelligence technology analyst Kunjan Sobhani said: “US restrictions on Nvidia’s A800 and H800 series tailored for the Chinese market were expected, given recent company commentary. A recent surge in orders from large Chinese customers indicates stockpiling of 800-series chips in anticipation of such restrictions, pulling sales forward.

“Though the restrictions won’t greatly affect short-term estimates, they can erode Nvidia’s long-term prospects.”

The new rules also require firms to notify the US government before selling chips that fall below the controlled threshold.

Top-of-the-line chips are best for powering AI models, a senior administration official said. But with a lot of money and a little jury-rigging, a whole class of slightly inferior chips could also be used for AI and supercomputing and therefore pose a national security risk, the official said.

The US wants to monitor that so-called grey zone activity, the official added, while declining to comment on the specific parameters of which chips will be affected.

The administration will review company notifications within 25 days, the official said, to determine whether firms need a licence to sell those chips to China.

Washington relented in one key area following a year of public comment on the initial rule: The updated curbs broadly allow the sale of advanced commercial chips to Chinese companies for use in consumer products like smartphones, computers and electric vehicles, as Bloomberg reported earlier.

But the Biden administration will restrict the most advanced consumer chips – like those used in AI data centres – and impose a notification process on a select number of varieties just behind the cutting edge.

The administration will also require firms to obtain a licence to sell chips to more than 40 countries that Chinese firms could use as intermediaries to skirt US controls.

The US is also expanding the scope of manufacturing gear subject to restrictions, said senior administration officials, without specifying the exact equipment.

Asked whether the US would restrict less advanced deep ultraviolet machines, which are mainly supplied by Dutch chip equipment leader ASML Holding, an administration official said that Washington has worked with the Netherlands on the policy.

ASML said that the new regulations will be applicable to a “limited number” of ASML fabs in China related to advanced semiconductor manufacturing, without saying which machines will be impacted.

“These export control measures will likely have an impact on the regional split of our systems sales in the medium to long term,” ASML said. “However, we do not expect these measures to have a material impact on our financial outlook for 2023 and for our longer-term scenarios.”

The updated rules will not include restrictions on access to US or allied cloud computing services, though the administration will issue a request for comment to better understand potential national security risks associated with this access – and options to potentially address them.

“Overly broad, unilateral controls risk harming the US semiconductor ecosystem without advancing national security as they encourage overseas customers to look elsewhere,” said industry group Semiconductor Industry Association, which represents Nvidia and major US equipment suppliers including Applied Materials.

“Accordingly, we urge the administration to strengthen coordination with allies to ensure a level-playing field for all companies.” BLOOMBERG