Renewed fears of potential US trade curbs on next-generation optical transceivers for data centres have sent shares of Chinese suppliers tumbling, deepening a sell-off across artificial intelligence supply chain stocks.

Shares of Chinese optical chipmakers extended their losses for a second straight session on Friday despite reassurances from major suppliers, while China’s benchmark CSI 300 Index slid 1.3 per cent by the midday break to its lowest level since August last year.

Upstream laser chip suppliers bore the brunt of the market downturn, suffering steeper declines than downstream optical transceiver manufacturers.

In Shanghai, Yuanjie Semiconductor Technology dropped 6.5 per cent on Friday, following a 20 per cent daily-limit plunge on Thursday, the first session after China’s week-long National Day holiday. Fellow laser chip supplier Everbright Photonics fell 5.4 per cent after a 20 per cent limit-down plunge a day earlier.

In Shenzhen, Dongshan Precision fell 3.4 per cent on Friday after hitting its 10 per cent daily decline limit on Thursday, while Shanghai-listed Shijia Photons was up 3.4 per cent following a 17.4 per cent loss the day before.

In contrast, major optical transceiver makers saw milder losses on Friday, with market leaders Zhongji Innolight and Eoptolink falling 3 per cent in Hong Kong and 2.19 per cent in Shenzhen, respectively.

The sector-wide sell-off was triggered by an October 1 research report by Morgan Stanley, which warned that the US Federal Communications Commission (FCC) could introduce restrictions on Chinese-made optical transceivers as early as this month.

The report noted that any potential measures would most likely target next-generation 3.2-terabit-per-second (3.2T) products. Optical transceivers are critical components in AI data centres, converting electrical signals into optical signals to enable high-speed data transmission between servers and computing equipment.

According to the US investment bank, Washington could consider a regulatory approach allowing Chinese-made optical transceivers into the US market if at least 65 per cent of their bill-of-materials (BOM) value originated from US-based companies.

Reports emerged in August that Washington was considering restrictions on Chinese optical transceivers, though the FCC’s finalised rules in September did not specifically target the products.

However, Morgan Stanley’s latest report noted that a local-content mandate would put heavy pressure on upstream suppliers, favouring American makers of laser chips and other components at the expense of Chinese rivals.

Major Chinese suppliers moved to reassure investors that any potential US measures would have a limited impact on their near-term operations.

In a stock exchange filing on Thursday, Dongshan Precision said the 65 per cent US-content requirement was based on market speculation rather than official regulatory policy. The company said optical chips accounted for no more than 10 per cent of its transceivers’ total BOM costs, adding that it had sufficient flexibility to adjust its supply chain. It did not rule out the possibility of establishing manufacturing facilities in the US if needed.

Meanwhile, an Everbright Photonics representative told Chinese news outlet National Business Daily that commercial production of 3.2T optical transceivers was not expected until 2028 or 2029. With current market demand anchored to 800G and 1.6T products, any restrictions targeting next-generation modules would have a limited immediate effect on the company, the person was cited as saying.