(Bloomberg) -- The Biden administration unveiled tight restrictions on new operations in China by chipmakers that get federal funds to build in the US, potentially hampering efforts to expand in the world’s largest semiconductor arena.

The $50 billion CHIPS and Science Act will now bar firms that win grants from expanding output by 5% for advanced chips and 10% for older technology. The Commerce Department also outlined other measures including a $100,000 spending cap on investments in advanced capacity in China.

Those so-called guardrails are part of Washington’s efforts to thwart Beijing’s ambitions while securing supply of the components that underpin revolutionary technologies, including AI and supercomputers, as well as everyday electronics. In past years, the US has blacklisted Chinese technology champions, sought to cut off the flow of sophisticated processors and banned its citizens from providing certain help to China’s chip industry.

The new restrictions tied to the CHIPS Act aim to impose more onerous limitations on companies expected to secure incentives, including industry leaders Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and Intel Corp., which all operate in China. The restrictions could hamper longer-term efforts to chase growth in the world’s No. 2 economy, while also making it hard for Beijing to build up cutting-edge capabilities at home.

China Foreign Ministry spokesman Wang Wenbin said Wednesday at a regular press briefing in Beijing that his government made a diplomatic complaint with the US over the latest curbs.

“The so-called guard-rails claimed by the US are an out-and-out sci-tech blockade and protectionism,” he said, adding Beijing would protect the rights and interests of Chinese firms. “The hobbling and containment will not stop China from growing, and will only strengthen our decision to seek self-development.”

Intel shares fell 2.4% in New York. Samsung and SK Hynix Inc. gained more than 1% Wednesday.

“CHIPS for America is fundamentally a national security initiative and these guardrails will help ensure malign actors do not have access to the cutting-edge technology that can be used against America and our allies,” Commerce Secretary Gina Raimondo said in a statement. “We will also continue coordinating with our allies and partners to ensure this program advances our shared goals, strengthens global supply chains, and enhances our collective security.”

To ensure federal funding beneficiaries cannot meaningfully expand advanced production capacity in what the law terms “countries of concern,” which includes China and Russia, the new rules will ban those firms from spending more than $100,000 when adding capacity for logic chips more sophisticated than 28-nanometers. They also cannot add more than 5% to the existing capacity of any single plant making these semiconductors in China.

While the proposed rule limits manufacturing expansion, grant recipients can still make technology upgrades to existing facilities to produce more-advanced semiconductors, if the companies receive any necessary export control licenses from the Commerce Department for doing so, an official familiar with the rule said. For example, a recipient upgrading the technological capability of a facility can include making logic chips at a smaller node size or memory chips with more layers.

Typically, a smaller number in nanometers indicates a more advanced generation for logic chips, which process information or handle tasks. Limits on the advanced capacity investments will be in place for 10 years. 

A single advanced chipmaking machine from a supplier like ASML Holding NV, Applied Materials Inc. or Tokyo Electron Ltd. can cost tens of millions of dollars. 

Grant recipients also aren’t allowed to increase capacity by more than 10% at their existing facilities in “countries of concern” for logic chips that are 28-nanometers or less-advanced, which the law defines as legacy semiconductors. If they want to build new factories for this type of chip, at least 85% of the output must be consumed by the host country and the companies must notify the Commerce Department.

While 28-nanometer chips are several generations behind the most cutting-edge semiconductors available, they’re used in a wide range of products including cars and smartphones. The US can claw back the full amount of federal grants if a recipient violates the rules, Commerce has said.

The federal government can also claw back tax credits completely if companies materially increase semiconductor production capacity in a foreign country of concern within 10 years of winning the incentives, according to a separate statement from Treasury. The credit is generally equal to 25% of qualified investments in a facility for making semiconductors or producing chip production machines in the US.

The new restrictions will make it even more challenging for TSMC to expand its most-advanced Chinese plant in the eastern city of Nanjing, where it’s manufacturing 28-nanometer and more-advanced 16-nanometer chips. In October, Chief Executive Officer C. C. Wei said TSMC was granted a one-year license from the US government to grow production in China, temporarily exempting it from sweeping export control measures rolled out that month.

The US office responsible for implementing the CHIPS Act will send officials to South Korea, Japan and Taiwan starting Tuesday, Taiwan’s official Central News Agency reported. TSMC spokeswoman Nina Kao declined to comment on the new restrictions. 

Samsung said it has been in close discussions with the US and South Korean governments, and it plans to determine its next step after reviewing the changes when they are announced. South Korea’s Hynix, which makes memory chips in China, also said it will closely review the announcement. Intel didn’t immediately respond to a request seeking comments.

Memory chipmakers such as Samsung will see tighter restrictions on their expansions in China as Commerce will align the new guardrails with prohibited technology thresholds released in October. The South Korean company runs a major site in the central city of Xi’an making NAND flash memory. Intel has an assembly and test chip facility in the central city of Chengdu, a modest operation compared to the others.

The US also classified a list of semiconductors as critical to national security, making them subject to stricter controls than other legacy chips. Those include compound semiconductors — an area of focus for the Chinese government in past years — chips designed for quantum information systems, specialized military capabilities and in radiation-intensive environments.

Read more: Biden Poised to Further Tighten Chipmaking Exports to China

Federal grant recipients will also be prohibited from engaging in joint research with, or licensing technology to, a foreign entity of concern. That will cover any research and development done by two or more people. Licensing will be defined as an agreement to make patents, trade secrets or knowhow available to another party. 

The list of foreign entities of concern will be broadened to include names on the Commerce Department’s entity list, the Treasury Department’s list of Chinese military companies, and the Federal Communications Commission’s list of equipment and services posing national security risks. That encompasses a host of China’s largest tech companies including Huawei Technologies Co., AI giant SenseTime Group Inc. and chip leaders such as Yangtze Memory Technologies Co.

The proposed rules will allow for 60 days of public comment before finalized regulations are published later this year.

--With assistance from Sohee Kim, Ian King, Cécile Daurat, Ville Heiskanen, Chien-Hua Wan and Philip Glamann.

(Updates with Chinese response in the Xth paragraph)

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