The H200 Compromise: How US-China AI Chip Policy Reinforces Decoupling

The US has formally carved out a conditional pathway for Nvidia's H200 chips to reach the Chinese market. The Department of Commerce's revised rules, scheduled to take effect this week, allow for case-by-case approval of sales to China under conditions that include that its China shipments account for no more than half of the amount sold domestically. This marks a significant, if narrow, shift from the presumptive denial stance that has governed exports since 2022. The move is a direct implementation of President Trump's stated intent to allow sales to "approved customers" while collecting a 25% fee on the earnings.

This policy is a structured compromise, not a free pass. The 50% cap on China shipments relative to US production is the central financial constraint. It directly caps the potential incremental revenue Nvidia can generate from this market, transforming what could have been a major growth vector into a highly contingent one. The rule also mandates rigorous "Know Your Customer" procedures and third-party testing in the US, adding layers of operational friction and compliance cost. For now, the H200 remains the most advanced chip to be legally exported to China, as the even more powerful Blackwell generation stays blocked.

The immediate effect is to reinforce the trend of deepening technological decoupling. The policy creates a formal, albeit restricted, channel for a strategic asset, but its financial benefit is entirely contingent on China's own implementation. Beijing has already signaled its intent to prioritize domestic chips, reportedly ordering tech companies to boycott Nvidia's China-bound products. In this light, the US policy does not bridge the divide; it simply defines the terms of engagement within a fractured supply chain. The compromise allows for a measured flow of advanced technology, but it does so within a framework designed to protect US strategic advantage, making the financial upside for Nvidia a function of geopolitical alignment as much as market demand.

The Chinese Reality: A Market in Hibernation

While the US has opened a narrow door, Beijing has left it ajar. The Chinese government's reported directive this week to tech firms is a clear signal of continued market caution. Authorities have told some companies they may only purchase H200 chips under special circumstances, such as for university research the Information reported on Tuesday, citing two people with direct knowledge of the situation. This is not an invitation to buy; it is a framework for limited, controlled access.

The directive's ambiguity is its own kind of restraint. Described as "deliberately vague", it tells firms to buy only when "necessary" but offers no clear definition of that threshold. This creates a high degree of uncertainty for potential buyers, who are left guessing about what qualifies. In practice, such vagueness is a powerful disincentive, likely suppressing near-term orders and keeping the market in a state of hibernation.

The government's actions go further, actively steering companies away from Nvidia. Last week, the report noted that China had asked some companies to halt their orders for the H200 chips as it looks to prioritize domestic firms in its AI development race. This is a direct policy intervention to protect and nurture local chipmakers, effectively using state power to limit foreign competition. For Nvidia, this means the potential customer base for its advanced chips is not just shrinking-it is being actively redirected.

The bottom line is that the US policy's conditional openness faces a wall of Chinese caution. The financial upside for Nvidia is therefore a function of two conflicting policies. The US has set a cap on shipments, while China has set a cap on demand. The result is a market where the structural conditions for a meaningful revenue boost are absent. Any sales that do occur will be small, symbolic, and likely concentrated in non-commercial, research-oriented use cases. For Nvidia, the H200 compromise offers a sliver of access, but not a path to growth.

Financial Impact and Valuation: A Nuanced Picture

The policy shift presents a nuanced financial picture for Nvidia, where headline access is tempered by structural constraints that limit its transformative potential. The most immediate impact is a hard cap on incremental revenue. The rule's 50% cap on China shipments relative to US production means that even if all approvals are granted, the market's contribution to total H200 sales is fundamentally limited. This is not a new growth market; it is a constrained channel for a portion of existing capacity. For a company whose valuation already prices in dominance, this incremental upside is a rounding error at best.

Market reaction confirms this assessment. Nvidia's stock has shown a muted response, with a 5-day change of -0.76% and a 20-day gain of 6.17%. This flat-to-slightly-positive move suggests investors view the policy as a contained, not transformative, event. The stock's broader trajectory-up 43% over the past year-indicates that the geopolitical risk premium has already been largely priced in. The H200 compromise, therefore, does not materially alter the near-term investment thesis; it simply defines the boundaries of a known constraint.

More critically, the policy does nothing to close the core revenue gap. Nvidia's most advanced Blackwell chips remain blocked from China, preserving a significant technological and financial chasm. The H200 is a generation behind, and its export does not address the fundamental issue of market access for the company's leading-edge products. This leaves the valuation anchored to the company's ability to monetize its technological lead elsewhere, primarily in the US and allied markets. The 25% fee President Trump has demanded on China earnings is a symbolic gesture that does not compensate for the lost scale of Blackwell sales.

From a valuation standpoint, the setup is one of high expectations meeting geopolitical reality. Nvidia trades at a forward P/E of nearly 50, a premium that demands flawless execution and continued innovation. The H200 policy reinforces that the company's growth path is now bifurcated: one lane is the high-margin, high-growth domestic and allied market, while the other is a restricted, low-volume channel for older technology. For the stock to sustain its premium, the company must demonstrate that the constrained China market is a non-material distraction, not a new source of meaningful revenue. The evidence so far suggests the market agrees.

Catalysts and Risks: The Path Forward

The H200 compromise now hinges on a series of future events that will define its commercial reality and signal the next phase of the AI supply chain split. The primary catalyst is China's own clarification of its purchase directive. The government's "deliberately vague" instruction to buy only under "special circumstances" like university research creates a high barrier to entry. The upcoming meetings with more companies may offer new guidance, but until that ambiguity is resolved, the actual market size for Nvidia's advanced chips remains undefined. This is the single most important variable determining whether the policy unlocks any meaningful sales volume or remains a symbolic gesture.

A major near-term risk is the potential closure of a critical workaround. The US House of Representatives has already passed the Remote Access Security Act, a bipartisan measure that would extend export controls to cloud-based access to US GPUs. This targets a real loophole: Chinese firms have been renting access to powerful US chips via cloud platforms like AWS since at least 2023. If the bill becomes law, it would force a hard choice on Chinese AI developers-either abandon the most advanced US hardware or find ways to circumvent a new digital-era rule. This legislative push underscores the US's determination to close every gap in its export control regime.

The long-term strategic risk, however, is structural and more profound. This policy, by allowing a limited flow of older technology, may inadvertently accelerate China's push for domestic AI chip alternatives. Beijing's simultaneous directive to halt H200 orders to prioritize local firms is a clear signal of intent. The H200 compromise does not address the core issue of market access for Nvidia's leading-edge products, which remain blocked. In this light, the policy may simply provide a temporary bridge while China's state-backed semiconductor industry gains momentum. The process of building a viable domestic alternative may still take time, but the political and economic pressure to do so is now intensified. For the broader AI supply chain, this signals a deepening bifurcation where each bloc must build its own technological stack, with Nvidia's role in China becoming increasingly peripheral.