China's Tencent Uses 'Weakest Link' in Export Rules to Access Nvidia's Top Chips — Barrons.com

By Jacob Adelman

Tencent Holdings has secured access to high-end Nvidia artificial-intelligence chips that remain restricted to Chinese buyers even after President Donald Trump's recent semiconductor agreement with the country. The owner of the WeChat social-media app is China's largest company by market value.

The access comes through a cloud service operated by Tokyo-based Datasection, which recently announced a deal to buy Nvidia's flagship Blackwell chips to use in data centers in Japan and Australia, a person briefed on the plan tells Barron's. Tencent is the client for those data centers, the person said.

Accessing Blackwell chips in the cloud avoids violating U.S. export restrictions that bar Chinese companies from owning those chips themselves. The situation has been flagged by members of Congress as a regulatory blind spot.

Tencent would be the highest-profile user of the gap in the rules, which are aimed at maintaining U.S. dominance in artificial intelligence.

The arrangement also undermines a recent assurance by Trump that Nvidia's top technology would remain off limits to China.

Datasection has announced deals for 15,000 graphical processing units, or GPUs, from Nvidia's flagship Blackwell line for data centers in Osaka, Japan, and Sydney, Australia. The data centers will be used by "one of the world's largest cloud-service providers," says Datasection.

The person who identified Tencent as that customer learned of the connection from business interactions in Japan.

In an interview with Barron's, Datasection CEO Norihiko Ishihara declined to share further details.

"I don't say yes; I don't say no," he responded when directly asked if the customer was Tencent.

In response to questions about Datasection and Tencent, a Nvidia spokesperson said, "By design, the export rules allow clouds to be built and operated outside controlled countries by approved firms." Controlled countries are nations that are subject to embargoes or other trade restrictions.

"Winning the business of those clouds is critical to maintain American technology leadership and promotes both national and economic security," the spokesperson said.

When Trump moved last week to allow Nvidia to sell one high-performance AI chip, the H200, to Chinese buyers, he drew the line at the Blackwell generation, as well as the upcoming Rubin line.

"Nvidia's U.S. customers are already moving forward with their incredible, highly advanced Blackwell chips, and soon, Rubin, neither of which are part of this deal," Trump posted on his Truth Social website. "My Administration will always put America FIRST."

Export rules bar Chinese companies from acquiring advanced U.S. chips, but don't stop them from accessing those chips' computing power remotely unless the companies are considered special security risks, says Collmann Griffin, a lawyer at Miller & Chevalier who previously served as a U.S. government sanctions policy adviser.

Some industry figures and their allies have argued that this allows U.S. chip makers to benefit from Chinese demand, with the assurance that trusted companies in allied countries won't allow the products to be misused.

But others, including New York Rep. Mike Lawler (R.), have described the practice as a dangerous loophole.

"Our export controls are only as strong as the weakest link," Lawler, who sponsored legislation that would provide regulators with tools to deal with the vulnerability, said in a statement earlier this year. "And right now, China is exploiting us."

Liu Pengyu, a spokesperson for China's embassy in Washington D.C., said in a statement to Barron's that the U.S. is "politicizing, over-securitizing, and weaponizing trade and technology issues."

In an October report, investment group Wolfpack Research said it had taken a short position on Datasection — which trades on the Tokyo Stock Exchange — based on its expectation that regulators may interfere with its cloud deal, hurting the company's share price.

Short sellers borrow shares and sell them immediately in anticipation of being able to buy them back later at what they expect to be a lower price.

Datasection's stock declined almost 14% after Wolfpack's report was published on Oct. 8, but has since recovered those losses.

Datasection CEO Ishihara says his business deals have been vetted by U.S. legal counsel to confirm their compliance with export regulations. He says Datasection has initiated a legal action against Wolfpack over its short report, but declined to discuss whether a complaint has been formally filed against the investment group.

Wolfpack declined to comment on its report.

To date, most known instances of Chinese companies remotely accessing U.S. chips have involved data centers in countries outside America's close orbit, such as those of Southeast Asia.

In July, Malaysian officials cited reports that a Chinese company had used servers equipped with chips from Nvidia and other makers to train large language models when announcing tighter rules around the movement of AI chips from the U.S., The Wall Street Journal reported.

Last month, the Journal reported on an Indonesian data center with 2,300 Blackwell chips that was providing computing power to a Shanghai-based AI start-up. The Indonesian business said the Chinese AI company has no physical access to its chips, and the deal would support AI applications tailored for use in Indonesia and Southeast Asia.

Griffin said he knew of no prior cases of a Chinese company accessing an AI data center in one of the U.S.'s most trusted countries, such as Japan.

Soon after Wolfpack published its report on Datasection, Kunihiro Tanaka, CEO of a leading Japanese data-center operator, Sakura Internet, expressed alarm in an X exchange over "the existence of dubious companies in Japan that attempt to circumvent export regulations."

"I just don't think chasing immediate gains is healthy for investors," said Tanaka, who chairs Japan's Data Center Association. "Especially now, when so many people are willing to side with shady Chinese interests for short-term profits."

Tanaka said in a later post that he wasn't referring to a specific company. A Sakura spokesperson declined to elaborate on Tanaka's remarks, saying the CEO had made them in his personal capacity, not on the company's behalf.

Beyond its projects in Osaka and Sydney, Datasection has presented to investors a pipeline of data centers planned across Japan, Australia, and Southeast Asia that are part of what it says is a plan to grow into a competitor to global players such as CoreWeave and Nebius. The hundreds of thousands of advanced chips planned for these facilities include some 170,000 Grace-Blackwell "superchips," according to company announcements.

Even if all of its data-center projects move ahead, the business would still amount to a fraction of Nvidia's overall sales.

The semiconductor maker expects to generate roughly $500 billion in revenue from its Blackwell and next-generation Rubin platforms from the start of this year through the end of 2026, a company official said in November. Recent months have seen major deals announced with big buyers including OpenAI, Microsoft, and CoreWeave.

Still, smaller orders also play an important role in semiconductor makers' sales strategies, says Harsha Madannavar, a tech-infrastructure specialist with LEK Consulting.

Nvidia and other chip designers pay high development costs to design GPUs to spec for buyers of huge quantities. But once they're designed, the incremental cost of manufacturing more units is relatively small, so makers routinely overproduce, and sell any excess to smaller providers with less specific needs, Madannavar says.

"It's like when you go to Noah's bagel in the afternoon," Madannavar says, in reference to a popular California-based bagel chain. "You can get the same bagel for half the cost."

Since Ishihara's elevation from Datasection chairman to its president and CEO in June of 2024, the former business-data and analytics company has been in growth mode as a data-center developer. It recently announced a partnership with Tokyu Land — the real estate development arm of one of Japan's biggest corporate conglomerates — to collaborate on projects including a data center on the northern Japanese island of Hokkaido.

Datasection has added high-profile names to its slate of directors and advisers, including Anders Fogh Rasmussen, the former Danish prime minister and secretary-general of the North Atlantic Treaty Organization; Pablo Casado Blanco, who had led one of Spain's main political parties; and Jeb Bush Jr., the nephew of former President George W. Bush.

Tokyu Land, Rasmussen, Casado, and Bush didn't respond to messages seeking comment.

Concurrently, Datasection has taken some steps that appear unusual for a company growing in size and stature.

At the same board meeting when Ishihara became CEO, directors also voted to change the company's auditor from Japan's affiliate of PwC — one of the so-called Big Four accounting businesses — to a small Tokyo-based firm called Amaterasu, according to Datasection filings.

Datasection said at the time that Amaterasu had been selected for its expertise and independence, as well as cost considerations.

Datasection is just one of five public companies audited by Amaterasu over the past year, according to Tokyo Stock Exchange data. Affiliates of the Big Four firms, which also include Ernst & Young, Deloitte & Touche, and KPMG, audit a majority of listed Japanese firms, an industry board said in a report last year.

Amaterasu managing partner Satoshi Fukudome declined to comment on his firm's engagement with Datasection, citing confidentiality obligations.

"Please refrain from making such unreasonable inquiries or sending emails in the future," he said in response to Barron's outreach.

PwC Japan said it has a policy of not commenting on individual companies.

Datasection's partner on its Osaka and Sydney projects is a firm called NowNaw Japan that Ishihara founded in 2022.