China's chip foundries ride AI wave to record profits, but US curbs shadow the boom

For anyone tracking the flow of capital in Asia, the latest earnings from China's two largest contract chipmakers are a loud signal that the mainland’s semiconductor industry is no longer just a supplier of low-end components. In the June quarter, SMIC and Hua Hong Grace Semiconductor reported net profits that surged 261.7% and 385.9% year on year, respectively, reaching US$479.2 million and US$38.6 million. These are not just numbers on a spreadsheet; they are a measure of how quickly Beijing's push for self-reliance is reshaping the global chip map.

SMIC, China's biggest foundry, and Hua Hong, its smaller sibling, are cashing in on a domestic boom in artificial intelligence chips that are free of US export controls. As Washington tightens restrictions on advanced semiconductor technology, Chinese tech giants are scrambling to source AI processors that can be made without triggering American sanctions. That has funneled orders to these two firms, which specialize in mature and mid-range nodes rather than the cutting-edge 3-nanometer or 5-nanometer processes that are off-limits. For an international reader, think of it as a kind of forced localization: when you cannot buy the most advanced chips, you build your own ecosystem around what you can make — and that is proving highly profitable.

The local context here is crucial. SMIC is not just a company; it is a national champion, backed by the state's Big Fund and tasked with reducing China's dependence on foreign semiconductors. Hua Hong, meanwhile, focuses on specialty processes like power management and embedded memory, which are essential for everything from electric vehicles to IoT devices. The surge in their profits is a direct result of Chinese AI startups and cloud providers shifting to domestic suppliers, partly out of necessity and partly out of policy. In Beijing's grand plan, this is the first step toward a self-sufficient chip supply chain, and the market is rewarding it.

But this boom is built on a foundation of sand. The US export controls that are driving demand are also the reason these companies cannot access the most advanced equipment, which limits how far they can go. For now, the market is thriving on the low- and mid-end segments, but the long-term question is whether China can break through the technological ceiling. The profit surge is real, but it is also a reflection of a market distorted by geopolitics — a bubble of domestic demand that may not sustain once the AI hype cools or if Washington eases restrictions.

For investors and wealth watchers in Asia, this is a double-edged sword. On one hand, these results show that Chinese chipmakers can be highly profitable even without the latest technology, offering a rare bright spot in a sector that has been battered by sanctions and supply chain disruptions. On the other hand, the reliance on a protected market means that any shift in policy — in Beijing or Washington — could quickly reverse the gains. The smart money is watching how these companies scale up their capacity and whether they can move up the value chain without tripping over export controls.

Looking ahead, the second half of the year will be a test. SMIC and Hua Hong are likely to keep riding the AI wave, but they face the challenge of expanding production while managing the risk of overcapacity in mature nodes. For Asia's capital markets, these companies are becoming bellwethers of how the region's tech sector can adapt to a fragmented global order. If they can sustain this growth, they will prove that China can play a major role in the AI supply chain even under sanctions. If not, the profits may turn out to be a temporary blip in a longer, more difficult journey. Either way, the world's wealth watchers should keep their eyes on these foundries — they are the frontline of a new economic war.