Nvidia faces downside risk as the U.S. government closes an AI chip export loophole to China, tightening controls on high-end GPUs via partner channels.

The US Department of Commerce has closed a significant loophole in its semiconductor export controls, requiring export licenses for advanced computing items sold to entities headquartered in China, even when those entities operate through subsidiaries in countries like Malaysia and Singapore. Updated guidance issued on May 31 targets this workaround that had reportedly allowed hundreds of thousands of Nvidia's Blackwell and Rubin processors to reach Chinese-controlled operations through indirect channels.

Previously, Chinese companies could establish subsidiaries in friendly third countries and purchase advanced Nvidia chips without triggering the export license requirements that would apply to direct sales to China. The Commerce Department's updated guidance now targets entities headquartered in Country Group D:5 (which includes China) or Macau, regardless of where their purchasing subsidiary is located.

The restrictions have evolved continuously since 2022, with various policy adjustments along the way. A December 2025 allowance permitted limited exports of the H200 variant, and continued revisions throughout early 2026 have kept the industry uncertain about further changes. The AI Diffusion rule implemented in 2025 was intended to serve as the comprehensive framework, but the subsidiary workaround remained one of the most significant gaps in the entire export control regime.

Nvidia CEO Jensen Huang has already acknowledged the reality. He stated that the company has "largely conceded" much of the direct AI chip market in China to domestic competitors like Huawei.

For Nvidia investors, the loophole closure eliminates what was effectively a backdoor revenue stream that had been partially offsetting the impact of formal restrictions. Given that the subsidiary workaround was facilitating purchases of hundreds of thousands of advanced chips, the scale of the now-blocked demand suggests the market may not have fully accounted for this revenue channel drying up.

This development has implications for decentralized AI compute networks, tokenized GPU marketplaces, and AI-powered DeFi protocols—all of which depend to some degree on the availability and pricing of advanced chips. AI-focused tokens have already shown sensitivity to Nvidia-related developments, and tokenized equity products linked to Nvidia or the broader semiconductor sector face similar exposure.