WASHINGTON/BEIJING/HONG KONG (Reuters) -Nvidia's ( NVDA ) planned resumption of sales of its H20 AI chips to China is part of U.S. negotiations on rare earths, Commerce Secretary Howard Lutnick said on Tuesday, and comes days after its CEO met President Donald Trump.

"We put that in the trade deal with the magnets," Lutnick told Reuters, referring to an agreement Trump made to restart rare earth shipments to U.S. manufacturers. He did not provide additional detail.

Nvidia ( NVDA ) said late on Monday that it is filing applications with the U.S. government to resume sales to China of its H20 graphics processing unit, and has been assured by the U.S. it will get the licences soon.

The planned resumption is a reversal of an export restriction imposed in April that is designed to keep the most advanced AI chips out of Chinese hands over national security concerns, an issue that has found rare bipartisan support. It drew swift questions and criticism from U.S. legislators on Tuesday.

The decision "would not only hand our foreign adversaries our most advanced technologies, but is also dangerously inconsistent with this Administration's previously-stated position on export controls for China," Democratic Representative Raja Krishnamoorthi, ranking member of the House of Representatives Select Committee on China, said in a statement.

Republican John Moolenaar, chair of that committee, said in a statement he would seek "clarification" from the Commerce Department. 

"The H20 is a powerful chip that, according to our bipartisan investigation, played a significant role in the rise of PRC AI companies like DeepSeek," Moolenaar said, referring to a Chinese startup that claims to have built AI models at a fraction of the cost paid by U.S. firms such as OpenAI. "It is crucial that the U.S. maintain its lead and keep advanced AI out of the hands of the CCP."

Shares of Nvidia ( NVDA ), the world's most valuable firm, closed up 4% and were nearly unchanged in after-market trading. Nvidia ( NVDA ) had estimated that the curbs would cut its revenue by $15 billion.

Nvidia's ( NVDA ) plan to resume sales has set off a scramble at Chinese firms to buy H20 chips, two sources told Reuters. The chips that Nvidia ( NVDA ) will resume selling are the best it can legally offer in China but lack much of the computing power of the versions for sale outside of China because of previous restrictions put in place by Trump's first administration and then President Joe Biden's administration.

But critically, H20 chips work with Nvidia's ( NVDA ) software tools, which have become a de facto standard in the global AI industry.

CEO Jensen Huang, who is visiting Beijing and set to speak at an event on Wednesday, has argued that Nvidia's ( NVDA ) leadership position could slip away if the company cannot sell to Chinese developers being courted by Huawei Technologies with chips produced in China.

The significance of the shift depends on the volume of H20 chips that the U.S. allows to be shipped to China, said Divyansh Kaushik, an AI expert at Beacon Global Strategies, a Washington-based advisory firm.

"If China is able to get a million H20 chips, it could significantly narrow, if not overtake, the U.S. lead in AI," he said.

CHINA IS CRUCIAL

"The Chinese market is massive, dynamic, and highly innovative, and it's also home to many AI researchers," Huang told Chinese state broadcaster CCTV on Tuesday.

China generated $17 billion in revenue for Nvidia ( NVDA ) in the fiscal year ending January 26, or 13% of total sales, based on its latest annual report.

Internet giants ByteDance and Tencent ( TCTZF ) are also in the process of submitting applications for H20 chips, the sources familiar with the matter said. Central to the process is an approved list put together by Nvidia ( NVDA ) for Chinese companies to register for potential purchases, one of the sources said.

Tencent ( TCTZF ) did not respond to a request for comment. ByteDance denied in a statement that it is currently submitting applications. Nvidia ( NVDA ) declined to comment on the approved list system.

Asked at a regular foreign ministry briefing in Beijing about Nvidia's ( NVDA ) plans to resume AI chip sales, a spokesperson said: "China is opposed to the politicisation, instrumentalisation and weaponisation of science, technology and economic and trade issues to maliciously blockade and suppress China."

China halted exports of rare earths in March following a trade spat with Trump that has shown some signs of easing. It dominates the market for rare earths, a group of 17 metals used in cellphones, weapons, electric vehicles, and more.

Huang's visit is being closely watched in both China and the United States, where a bipartisan pair of senators last week sent the CEO a letter asking him to abstain from meeting companies working with military or intelligence bodies.

The senators also asked Huang to refrain from meeting with entities named on the United States' restricted export list.

Rival AI chipmaker AMD also said the Department of Commerce would review its licence applications to export its MI308 chips to China; it plans to resume those shipments when licences are approved, it said. Its shares gained 7% in trading on Tuesday.