Shares in SMIC, China's largest contract chipmaker, plunged on Thursday, after two US congressmen called on the White House to further restrict export sales to the company.
The comments came after Huawei Technologies introduced the Mate 60 Pro, a Chinese smartphone powered by an advanced chip that is believed to have been made by SMIC.
Last week's launch shocked industry experts who didn't understand how SMIC, which is headquartered in Shanghai, would have the ability to manufacture such a chip following sweeping efforts by the United States to restrict China's access to foreign chip technology.
TechInsights, a research organization based in Canada specializing in semiconductors, revealed shortly after the launch that the smartphone contained a new 5G Kirin 9000s processor developed specifically for Huawei by SMIC.
This is a "big tech breakthrough for China," Jefferies analysts said Tuesday in a research note.
The development has fueled fears among analysts that the US-China tech war is likely to accelerate in the near future.
US representative Mike Gallagher, chair of the US House of Representatives committee on China, called on the US Commerce Department on Wednesday to end all technology exports to Huawei and SMIC, according to Reuters.
Gallagher was quoted as saying SMIC may have violated US sanctions, as this chip likely could not be produced without US technology.
"The time has come to end all US technology exports to both Huawei and SMIC to make clear any firm that flouts US law and undermines our national security will be cut off from our technology," he said.
Shares in SMIC, which stands for Semiconductor Manufacturing International Corporation, sank 6.3% in Shanghai and 5.1% in Hong Kong on Thursday. Hua Hong Semiconductor, China's second largest chip foundry, tumbled 4.8%.
Texas Republican Michael McCaul, who chairs the House Foreign Affairs Committee, was quoted by Reuters as saying he was concerned about the possibility of China trying to "get a monopoly" in the manufacture of less-advanced computer chips.
"We talked a lot about advanced semiconductor chips, but we also need look at legacy," he reportedly said, referring to older computer chip technology which does not fall under export controls.
"I think China is trying to get a monopoly on the market share of legacy semiconductor chips as well. And I think that's a part of the discussion we'll be having," he said.
Chinese state media have touted the development as a sign the country had successfully "broken US sanctions" and "achieved technological independence" in advanced chipmaking.
Memes galore
Meme makers on the Chinese internet have even crowned US Commerce Secretary Gina Raimondo the unofficial brand ambassador for the Mate 60 series.
The memes poke fun at the idea that that US sanctions, which are implemented and enforced by the US Commerce department, may have indirectly led to the launch of the new phone as China's homegrown firms had to work with the available technology.
Raimondo visited China last week, when the phone was launched. The memes have gone viral online and been reported on by state broadcaster CCTV.
Before Thursday, SMIC's shares in Hong Kong had rallied more than 20% within two weeks due to investor optimism. Huahong Semiconductor jumped 11%.
CNN has reached out to Gallagher's and McCaul's offices for comment, but has yet to receive a response.
Huawei was added to a blacklist in May 2019 by the US Commerce Department over national security concerns. That means companies have to apply for US export licenses to supply technology to Huawei.
SMIC was also put on the same list in 2020, as US officials were concerned it could use American technology to aid the Chinese military. SMIC has denied having any relationship with the Chinese military.
"The fact that China has achieved a big breakthrough in [semiconductor] tech will likely create more debate in the US about the effectiveness of sanctions," said the Jefferies analysts.
They expect the Biden administration to tighten chips ban on China, which was introduced in October 2022, in the next few months, further limiting China's access to advanced US semiconductors.
"Overall the US-China tech war is likely to escalate," they said.