China's ambitions for semiconductor self-sufficiency thwarted by lack of chipmaking tools

China is scrambling to counter U.S. chip restrictions, but its attempts at manufacturing key equipment reveal it's not just a matter of spending billions.

Making the most advanced semiconductors requires cutting-edge lithography scanners to print the small, complex circuit designs onto microchips. Netherlands-based ASML is the only company in the world that can make those machines. But the Dutch government has banned the sale of its most advanced equipment to China.

That means building those machines is a focal point in China's push to develop its domestic semiconductor industry with $96.3 billion in subsidies and preferential policies, according to CNBC's calculation of three largest state funds.

Last week, China announced its latest lithography scanner could support a resolution of 65 nanometers or better, a significant improvement from the 90-nanometers machine it developed in 2022. But still way behind ASML's machines with resolutions below 10 nanometers. Smaller resolutions enable the production of more powerful chips.

It would take a "large technology breakthrough" from the current 65 nm model to the latest immersive deep ultraviolet (DUV) lithography machines from ASML, Leping Huang, managing director and chief technology analyst at Huatai Securities, said.

In the meantime, ASML is still selling what it can to China. The company's share of revenue from sales to Chinese clients more than doubled to 49% in the second quarter this year, from 17% in the last quarter of 2022.

That spike suggests China's industry "doesn't think they have a viable domestic alternative yet," said John Lee, director at consultancy East-West Futures.

China has ramped up spending on semiconductor equipment since the U.S. introduced tighter export