US closes loophole that allowed Chinese-owned subsidiaries located outside China to buy AI chips — report claims that hundreds of thousands of advanced AI chips have been acquired through BIS blind spot

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You don't need to import banned chips into China if you can export your company instead.

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The U.S. Bureau of Industry and Security, the federal agency in charge of enforcing export controls, just released updated guidance that prevents Chinese-owned subsidiaries from purchasing advanced AI chips, such as Nvidia GB200 and AMD MI350x chips. According to the South China Morning Post (SCMP), some Chinese AI firms used subsidiaries based in another country, like Malaysia, to purchase these chips legally. It’s unknown how many servers were shipped in this manner, but one source told the SCMP that it’s probably in the range of hundreds of thousands.

The document says, “that a license is required to export advanced computing items to entities headquartered in Country Group D:5 or Macau or with an ultimate parent company headquartered in Country Group D:5 or Macau — even if the entities themselves are located outside Country Group D:5 or Macau.” With this loophole closed,

Former State Department official Chris McGuire said on X, “This is a HUGE problem.” That’s because even though the U.S. has prevented its most advanced chips from going to China, the loophole meant that those China-based firms could just set up entities in friendlier countries and then use them to purchase the AI chips they need and run them remotely. This is far more convenient than the reported technique of smuggling suitcases full of storage drives and then renting AI servers to train models, and it could also explain the massive 366% increase in AI chip shipments that Malaysia saw when law enforcement started stamping down on chip smuggling last year.

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What's worse, though, is that the same loophole also allows these subsidiaries to purchase advanced AI chips from TSMC. While there is a rule that requires TSMC to do enhanced due diligence on AI chip orders, McGuire says that the latest BIS announcement does not clarify if it is enforcing this. This means that Chinese companies could use this route to purchase manufacturing capacity from TSMC (although the company is reportedly sold out for its most advanced processes through 2028).

All this confusion came after the Commerce Department said that it would not enforce the Biden-era AI diffusion rules. Even though Washington issued sweeping new export regulations, it seemed that this was a blind spot that the regulators missed out on, and it took more than a year for the authorities to patch the problem.

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Jowi Morales
Jowi Morales
Contributing Writer

Jowi Morales is a tech enthusiast with years of experience working in the industry. He’s been writing with several tech publications since 2021, where he’s been interested in tech hardware and consumer electronics.

5 Comments Comment from the forums
  • LordVile
    Isn’t the issue currently that china doesn’t want the chips?
    Reply
  • usertests
    LordVile said:
    Isn’t the issue currently that china doesn’t want the chips?
    If smuggling is still going on, that's either a lie to save face or bolster their trade negotiating position, or companies are defying the Chinese government in order to grab as many GPUs as they can.

    It would be pretty cyberpunk if China executed a GPU smuggler.
    Reply
  • nookoool
    Huawei: "Thank you for closing the loopholes"
    Reply
  • LordVile
    usertests said:
    If smuggling is still going on, that's either a lie to save face or bolster their trade negotiating position, or companies are defying the Chinese government in order to grab as many GPUs as they can.

    It would be pretty cyberpunk if China executed a GPU smuggler.
    Probably a mix of both but there’s no US limit on AI chips being sold to china as the title implies, they’re actively trying to sell them to china now. The issue is china saying no, at least officially.
    Reply
  • thth
    It's a nothingburger. They didn't close any loopholes or issue any new rules. What they did was issue a notice "reminding" that when it comes to China related chip controls, it extends to any company whose ultimate parent company is in China. This is already the language in the original rule from 2023. They just referred back to the 2023 rule reminding that it is still the case. They had to issue this notice because someone in Washington floated a paper claiming this to be a loophole.
    Reuters asked Nvidia about this and they responded that it changes nothing because it's the rule that has been in place since 2023.

    The real loophole that still exist is that companies that are not Chinese and not subsidiaries of Chinese companies can just buy it from Nvdia and then sell to Chinese companies without Nvidia involvement. Biden admin published a rule to close this loophole in their last month in office. It was set to take effect 6 months later, but Trump admin cancelled it before it could take effect.

    So the current reality is the company that buys the chips directly from Nvidia does not need to be a Chinese company or a subsidiary of a Chinese company for the chips to ultimately end up in China.
    Reply