Chinese AI hardware stocks tumble after US drafts ban on optical transceiver imports

The proposed ban

Reuters reported on August 4 that the Trump administration is drafting a ban on US imports of new models of Chinese optical transceivers. Four people familiar with the matter said the Federal Communications Commission is working on the measure, which aims to block devices that allow data to travel over fiber-optic cables at the speed of light within data centers. Officials hope to publish the regulation this year, when it would take effect immediately.

The move targets components described as critical infrastructure for the AI boom. Administration officials are concerned that Chinese-made transceivers could be exploited to steal data, install malware, or disrupt service at US data centers that house the chips used to train and run AI models. The sources, who spoke on condition of anonymity, stressed that the FCC could still modify or shelve the restriction.

As the data center buildout scales up, you want to make sure the data center supply chain is secure from the get-go.

Market meltdown

Chinese AI hardware stocks plunged in early trading on Wednesday. The CSI300 Telecommunication Services Index tumbled as much as 9% before paring some losses to close about 4% lower. Zhongji Innolight, one of the world's largest transceiver suppliers, fell more than 13% at one point in Shenzhen and closed 7.64% lower, while its Hong Kong shares, listed only on 30 July, ended down 5.2% at HK$1,116. Eoptolink lost more than 8% during the morning and closed 5.71% lower, and Suzhou TFC Optical Communications, down about 5% at the open, finished 0.8% lower.

Since the start of 2023, Innolight and Eoptolink shares had soared roughly 4,500%, catapulting them into the ranks of China's most valuable companies on the back of the global AI build-out. The sharp reversal on Wednesday reflects the companies' reliance on the American market, though all three played the report down. Innolight said it had verified that the FCC has issued no restrictive document in this area and would not comment on a rule that does not exist, Eoptolink said the report lacked an authoritative source, and Suzhou TFC said the effect was one of market sentiment and depended on whether the report proved true. Chinese brokerages noted that both leading suppliers built capacity in South East Asia some time ago and now ship to North America largely from plants outside China, which limits the reach of a ban on imports of Chinese-made devices.

Revenue exposure

Both Zhongji Innolight and Eoptolink generate the overwhelming majority of their revenue overseas, primarily from US tech giants. Last year, more than 90% of Innolight's RMB 38.2 billion ($5.6 billion) in revenue came from outside China. For Eoptolink, the figure stood at 96%. In the first quarter of this year alone, Innolight generated 62% of its revenue from the United States.

Net profit at Innolight rose to RMB 10.8 billion ($1.6 billion) last year, up from RMB 2.2 billion in 2023. Eoptolink profits climbed from RMB 688 million to RMB 9.5 billion over the same period. The two companies supply components to Amazon, Alphabet, Huawei, and Alibaba, benefiting from both the American and Chinese data center build-outs.

Beijing's warning

The Chinese embassy in Washington responded sharply to the Reuters report. It urged the United States to "heed the objective and rational voices of the business communities in both countries" and to stop "smearing Chinese companies and threatening them with sanctions."

China will take all necessary measures in response to any action that causes material harm to its interests.

The official newspaper of China's ruling Communist Party published a commentary on Wednesday warning of countermeasures, adding a fresh source of strain to the fragile trade truce between the world's two largest economies. Kenny Ng, a strategist at Everbright Securities International, said the latest salvo from Washington will intensify Beijing's push for self-reliance in technology, adding that disruptions would "drive up costs for downstream application enterprises, thereby impacting the development pace of the AI industry."

Pre-emptive security logic

Administration officials are keen to avoid a repeat of the Huawei situation, where Chinese telecom equipment was so deeply embedded in US infrastructure that removal efforts proved slow, expensive, and incomplete. By targeting optical transceivers now, officials hope to secure the data center supply chain before Chinese components become similarly entrenched.

The FCC has historically operated with a degree of independence, but a Supreme Court ruling in June that backed President Donald Trump's firing of a Democratic Federal Trade Commission member has expanded White House influence over regulatory agencies. The four sources told Reuters that the FCC could still modify or shelve the proposed restriction, leaving room for diplomatic or industry pushback before any final rule is published.

Zhongji Innolight currently holds approximately 27% of the global transceiver market, according to Counterpoint Research, underlining the scale of the potential disruption to both US data center operators and Chinese component manufacturers if the ban proceeds.