Nvidia Photo: VCG

Following Nvidia's announcement of its second-quarter revenues for the period ending July 27, 2025, Fortune magazine published an article on its website headlined "Nvidia earnings beat Wall Street's sky-high expectations, but the stock is falling because 'there were no H20 sales to China-based customers'." Stock market sentiment highlights once again the importance of the Chinese market to this American chip manufacturer.

Nvidia on Wednesday reported revenue for the second quarter of $46.7 billion, up 6 percent from the previous quarter and up 56 percent from a year earlier. Even though this figure came in slightly above analysts' forecasts, CNN reported that "investors aren't loving it - the company's shares dipped as much as 3.5 percent in after-hours trading immediately following the report."

This decline may not have a real-world impact on Nvidia, given that its stock had reportedly surged 35 percent this year as of Wednesday's close. However, it does reflect market sentiment or, more precisely, investors' initial reaction to Nvidia's latest financial report.

The factors driving market sentiment are likely multifaceted, with one aspect being Nvidia's performance in the Chinese market. Notably, Nvidia reported that there were no H20 sales to China-based customers in the second quarter. 

According to CNN, the White House in April blocked the export of certain artificial intelligence (AI) chips to China, including Nvidia's H20 chips. This suggests that Nvidia's underwhelming performance in the Chinese market can largely be attributed to the export controls imposed by Washington.

The Chinese AI chip market is experiencing rapid growth. A report released by the research institute ASKCI indicates that the market reached 120.6 billion yuan ($16.9 billion) in 2023, a year-on-year increase of 41.9 percent. ASKCI analysts predict that this year, the market will expand to 153 billion yuan.

Based on the initial market reaction to Nvidia's earnings, it's clear that investors recognize the importance of the Chinese market for the company. Michael Ashley Schulman, chief investment officer at Running Point Capital, told Reuters that Nvidia's biggest bottleneck isn't silicon, it's diplomacy. He noted that Nvidia's growth curve was "still impressive, but not as exponential."

It seems that Nvidia also places significant importance on the Chinese market and is actively working to persuade Washington to allow more of its chips to be exported to China. According to CNBC, Nvidia CEO Jensen Huang predicted the AI market in the world's second-biggest economy will grow 50 percent next year.

The recent developments, especially the stark contrast between Nvidia's better-than-expected revenues and its stock decline, should prompt some introspection among US political elites. It's worth considering how America's chip export controls might be adversely affecting not only US chip companies but also the country's overall semiconductor capabilities.

H20's predicament is not only due to the export restrictions imposed by the US in April but also involves security risks. Particularly noteworthy is the public discussion among American politicians over the past few months about requiring high-end AI chips exported to have "location verification" capabilities for remote tracking. In this context, there is reasonable market speculation about whether Nvidia can withstand this pressure and whether it might install "backdoors" in its chips. If this issue is not effectively clarified, the security risks associated with Washington's "location verification" demands could potentially have a long-term negative impact on Nvidia's sales in China.

Another significant development occurred on Thursday morning. According to a Reuters report, Asian stocks experienced a volatile session as concerns about Nvidia's business prospects in China affected its regional suppliers, while igniting outsized gains in its Chinese counterparts. On Thursday, shares of some Chinese chip manufacturers surged, with SMIC gaining as much as 17.45 percent.

This is the market's way of "voting with its feet" in response to the risks that US chip export controls pose to chip manufacturers, and the continuous growth of China's domestic chip industry.

The recent rise in stock prices of Chinese chip manufacturers reflects the broader growth of China's domestic chip industry. Even though Nvidia reported "no H20 sales to China-based customers," the development of China's chip and AI sectors has clearly not stalled. There is no "dependency" on Nvidia as some in the US might suggest.

Of course, there are still challenges ahead for China's chip industry, but these are being actively addressed. The international market's reaction to Nvidia's financial report underscores that US chip export controls, while creating uncertainties for Nvidia, have not hindered the ongoing progress of China's chip industry.