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Leading AI chipmaker NVIDIA says it will soon resume sales of its H20 AI chips to China, after receiving reassurances it could do so from the Trump administration. An easing of restrictions follows a high-profile White House meeting between NVIDIA CEO Jensen Huang and US President Donald Trump last week, where Huang reportedly warned that curbing AI chip sales abroad could risk forfeiting US leadership in artificial intelligence to Chinese competitors. The company’s mid-tier H20 chip had previously been banned under April's US export restrictions imposed by the Trump administration, resulting in a USD 5.5bn inventory write-off and the loss of a key sales market for NVIDIA. Media reports also indicate that NVIDIA is developing a new, lower-tier AI chip for China that fully complies with US export controls.

The relaxation of the US chip restrictions comes amid broader tariff and trade negotiations with China, with Beijing said to seek more access to advanced AI chips. Details are not yet fully clear, but reports suggest Huang will brief the media from China on Tuesday, where he is meeting with partners, customers, and top Chinese officials. Separately, the Malaysian government announced new restrictions on the export and transit of high-performance AI chips, following reports of illegal re-exports to countries subject to stricter US chip controls.

While the latest China chip headlines are encouraging, we see them as just one of several important considerations for investors focused on the sector:

Fewer restrictions are positive for broader AI and tech supply chains. Without taking any single-company views, the resumption of some US AI chip sales in China would add to already robust global demand for AI chips, which has been growing this year on both sovereign AI deals in Europe and the Middle East and thanks to solid US large-cap tech capex. While the H20 news is a clear positive development for broader sentiment, the muted share price reaction in North Asia's tech sector suggests investors at least partially anticipated it. We think an easing of US restrictions would benefit select stocks across semiconductor contract manufacturing, advanced memory makers, the AI data center and server supply chain, and select China-based data center operators. Large-cap China tech firms may also benefit from easier access to leading AI compute and inference capacity.

Geopolitical risk and the semiconductor outlook are increasingly intertwined. While the China H20 headlines are constructive for the sector, the landscape remains complex. Malaysia’s new export control regime, while potentially a positive for local data center operators, comes after reports of intensifying US scrutiny on how advanced AI chip exports to the country are used and potentially resold to restricted nations. The Trump administration has also started threatening higher tariffs ahead of its self-imposed 1 August negotiating deadline. Semiconductors may face sector-specific tariffs, with uncertainty over the longevity of current carveouts. Investors will need to manage both positive and negative policy developments, as well as increased volatility in the near term.

Earnings, not just headlines, will drive the next part of the rally. Second-quarter results from key large-cap tech and semiconductor companies in the coming week should provide a clearer understanding on underlying demand and sector fundamentals. We note that the recent rally in large-cap tech and AI stocks has been fueled mainly by price-to-earnings (P/E) multiple expansion. While we remain structurally bullish on AI, we would prefer to see further gains underpinned by upward earnings-per-share (EPS) revisions rather than valuation expansion alone. Sustainable growth in the sector will ultimately depend on continued improvement in profitability and operational performance, not just positive headlines or policy shifts.

So while the resumption of NVIDIA H20 chip sales to China would be a constructive development for the AI theme and the semiconductor sector, investors should remain mindful of the broader risks. Pockets of elevated valuations across leading AI companies, ongoing geopolitical uncertainty, and the upcoming second-quarter earnings season all point to the need for a balanced and selective approach. We recommend investors seek diversified exposure across semiconductors, software, and internet platforms, rather than concentrating risk in any single segment or individual stock. Strong AI capex trends and supportive currency dynamics underpin the longer-term opportunity, and we forecast 12% global tech profit growth in 2025.