BEIJING/SHANGHAI (Reuters) - China's purchases of chipmaking equipment are set to decline this year after three years of growth, as the industry grapples with overcapacity and faces greater constraints from U.S. sanctions, a consultancy said on Wednesday.

China has been the biggest buyer of wafer fabrication equipment for at least the past two years, purchasing $41 billion worth of tools and accounting for 40% of global sales in 2024, Canadian semiconductor research company TechInsights said.

But this year, China's spending is expected to drop to $38 billion, down 6% year-on-year, and its share of global purchases will fall to 20% in the first decline since 2021, Boris Metodiev, a senior semiconductor manufacturing analyst at TechInsights, told an online seminar.

"We can see some slowdown in Chinese spending due to export controls and overcapacity," he said.

China was the growth driver globally for the global wafer fabrication equipment sector in 2023 and 2024, when the broader market experienced a downturn due to slumping consumer electronics demand.

Many of China's purchases were driven by stockpiling as the U.S. levied a series of sanctions in a bid to stymie Beijing's ability to access and produce chips that could help advance artificial intelligence for military applications or otherwise threaten U.S. national security.

Chinese chip firms have continued to make progress in spite of Washington's efforts, with China's largest chipmaker SMIC and U.S. sanctioned Huawei producing an advanced chip last year by using more expensive and laborious efforts.

They have also expanded heavily into the mature-node chip segment, dramatically increasing production capacity and taking market share from Taiwanese rivals.

SMIC flagged on Wednesday that it saw oversupply risk in mature node chips.

Chinese leading equipment makers including Naura Technology Group and AMEC have been expanding their footprint globally, with Naura now the world's seventh-largest equipment maker in terms of sales, Metodiev said.

While China has been working to become more self-sufficient in chipmaking equipment, its biggest weaknesses remain lithography systems, as well as testing and assembly tools, Metodiev said.

The Netherlands' ASML is the world's largest manufacturer of lithography machines. Chinese companies provided only 17% of testing tools and 10% of assembly equipment used in the country in 2023, Metodiev added.