In its continued crackdown on China's chip industry, the U.S. is set to impose a limit on the chip production capabilities of South Korean chipmakers Samsung Electronics Co and S.K. Hynix Inc in China.

"We're working with those companies on the way forward there," U.S. Undersecretary of Commerce for Industry and Security Alan Estevez said at a think tank event last week.

"What it'll likely be is a cap on the levels they can grow to in China," he said.

South Korean firms were provided with a temporary exemption from sweeping U.S. export controls unveiled in October last year, preventing chipmakers from bringing equipment for their advanced facilities in China.

Under the export control regulations imposed by the U.S., a license is required for items destined for any semiconductor fabrication facility in China that makes chips of certain specifications, including dynamic random access memory, or DRAM, chips of 18 nanometers or less, NAND flash memory chips with 128 layers or more, and logic chips of 16 nm, 14 nm or below.

S.K. Hynix, which operates a memory chip manufacturing facility in the eastern Chinese city of Wuxi, will be severely hit if advanced machines (extreme ultraviolet lithography systems) required to manufacture its products are unavailable in China. Wuxi fab produces more than 40% of the company's DRAM chips, its main business. S.K. Hynix has about 30% of the global market for DRAM.

The company is also working on a contingency plan to sell its memory chip production facilities in China.

Samsung's NAND flash production capacity in Chinese city of Xian accounts for more than 14% of global capacity. Samsung holds about 30% of the global NAND flash memory market.

The impact of export bans imposed by the U.S. has caused major production trouble to Chinese chipmakers delivering a massive setback to the government's ambitions to make the country a semiconductor powerhouse.

In October 2022, the U.S. Commerce Department announced sweeping restrictions to curb China's manufacturing dominance in the supply chain sector.

The Biden administration announced that it would impose restrictions on 31 Chinese companies, research institutions and related groups effective October 21, effectively blocking their ability to obtain core U.S. technologies.

The Commerce Department claimed that the latest export control moves were intended to halt shipments of chips and chip-making technology of potential use to China in its military build-up and bid to dominate key industries.

The Biden administration also added China's top memory chipmaker Yangtze Memory Technologies (YMTC) and 30 other Chinese entities to a so-called 'unverified' trade list. Already, some senators were pushing for investigations against Apple for their deal with YMTC in September 2022.

YMTC was to supply 3D NAND memory chips to Apple. The latter, however, was forced to reassess the decision, given the pressure from the senators, and also citing YMTC's closeness to the Chinese government.

YMTC was also a supplier to Huawei, and therefore, it was against the export controls announced during the Trump administration in 2020.

Nvidia and Advanced Micro Devices (AMD) were also restricted from supplying high-end graphics processors and A.I. chips essential for high-performance computing processes.

The repercussions from the restrictions were immediate. In less than a week, China's chip companies took a hammering on the stock market, losing as much as $8.6 billion in market value.

In the past month alone, NAURA Technology Group has lost 16 per cent of its value. Another key company, Hwatsing Technology group, is down by 19 per cent. China's SMIC has also been on the decline for a year now. To make matters worse, even global giants are now beginning to desert China.

Lam Research, Applied Materials, and KLA Corporation, critical players in the semiconductor production process, have halted their sales and other supplies to China.

ASML, engaged in chip making equipment, has told its staff in the United States to halt their trade with Chinese customers as they study the sanctions.

LAM Research, as per the report, has started pulling out support staff from Chinese chip-making companies including the YMTC and suspended all presale negotiations with the Chinese customers.