U.S. Closes Loophole in AI Chip Purchases by Chinese Subsidiaries: Hundreds of Thousands May Have Been Acquired

The U.S. government has tightened its regulations on the acquisition of advanced AI chips by Chinese companies. The Bureau of Industry and Security (BIS) under the U.S. Department of Commerce issued updated guidance, effective May 31, 2026, clarifying that export licenses are required for overseas subsidiaries of companies headquartered in China to obtain advanced AI chips. This move aims to close a loophole that allowed companies to bypass U.S. restrictions by setting up operations in Malaysia or other third countries. However, the announcement has also revealed the possibility that a significant number of AI chips may have already flowed into China through this regulatory gap.

What the New BIS Guidance Means

The crux of the document released by the BIS is that the requirement for an export license depends on the headquarters of the parent company, rather than the location of its subsidiary. Specifically, subsidiaries of companies headquartered in regions classified as Country Group D:5—including China and Macau—will require a license to export advanced computing products, even if these subsidiaries are based in countries not subject to the same restrictions, such as Singapore or Malaysia. This regulation targets cutting-edge AI accelerators like NVIDIA’s GB200 and AMD’s MI350x.

The new guidance follows criticism of the BIS for its lax enforcement of existing export controls. Former U.S. State Department official Chris McGuire emphasized on social media that this loophole had been a “major issue.” While the U.S. has long prohibited the direct transfer of its most advanced chips to mainland China, there have been instances where Chinese firms legally purchased the same chips via their subsidiaries in third countries and used them remotely, effectively bypassing the restrictions.

The Scope and Impact of the Loophole

This regulatory gap was not merely a theoretical vulnerability. According to a report by the South China Morning Post (SCMP), Chinese AI companies have been acquiring these chips through subsidiaries in countries like Malaysia. Although the exact number of chips that have entered China remains unclear, sources told SCMP that the figure could reach hundreds of thousands. If true, this would suggest a massive evasion of U.S. export controls.

This method of acquisition was far more convenient and scalable than previously reported tactics, such as smuggling storage drives full of data or renting AI servers to train models. In fact, in 2025, when law enforcement began cracking down on chip smuggling, shipments of AI chips to Malaysia surged by an astonishing 366% year-over-year. This sharp increase may serve as evidence of the loophole’s exploitation.

New Concerns Surrounding TSMC

An even more troubling issue is the possibility that the same loophole was exploited to bypass regulations concerning advanced semiconductor manufacturing capabilities. McGuire noted that the BIS’s latest guidance does not explicitly address enforcement measures for Taiwan Semiconductor Manufacturing Company (TSMC).

The U.S. typically requires TSMC to conduct enhanced due diligence on AI chip orders. However, Chinese companies may have used their overseas subsidiaries to directly procure manufacturing capabilities—such as wafer fabrication—from TSMC, potentially evading regulatory oversight. If this is indeed the case, Chinese firms could continue to acquire advanced semiconductors, which they are unable to produce domestically, through Taiwanese foundries. While TSMC’s cutting-edge production capacity is reportedly fully booked through 2028, making immediate large-scale acquisitions unlikely, this scenario poses a significant long-term security risk.

Ongoing Challenges in Enforcing Export Controls

The new guidance is seen as an effort to resolve confusion that arose after the U.S. Department of Commerce signaled it would not enforce certain export controls. However, while the BIS has clarified the application of regulations to Chinese subsidiaries, questions remain about the thoroughness of enforcement and the monitoring framework for companies like TSMC.

As U.S.-China competition for technological dominance intensifies, AI chips and advanced semiconductors are increasingly viewed as strategic assets. The U.S. government has been gradually strengthening export controls to curb China’s AI development capabilities. However, the complexity of the globalized semiconductor supply chain has once again highlighted the difficulty of fully enforcing these regulations.

Moving forward, U.S. authorities will need to not only close existing loopholes but also enhance monitoring and crackdowns on illegal circumvention routes. At the same time, tougher regulations risk fragmenting the semiconductor supply chain and fundamentally altering the structure of the global semiconductor industry. As technological advancements and geopolitical tensions converge, the battle over advanced AI chips is expected to intensify further.