The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, July 22 (Reuters Breakingviews) - The U.S. and China want to restrict overseas access to advanced AI models, but supply chains for the supporting hardware are harder to disentangle. Suzhou-based Zhongji Innolight 300308.SZ, which makes optical transceivers for data centres and generates most of its revenue in America, on Wednesday launched a $7 billion IPO, Hong Kong’s largest since 2019. Backers from Singapore’s Temasek to Canada’s CPPIB have snapped up half of the Shenzhen-listed company's offering. For now they are looking past the growing geopolitical risks to deepen their AI exposure.

Innolight's components help shift data through fibre-optic cables and are crucial for advanced computing systems whose scale strains the limits of legacy technology using copper wiring. It boasts about a quarter of the global market for optical interconnects and has a near monopoly in the next generation of those devices, according to Counterpoint. No wonder business for the $187 billion company is booming: net profit doubled last year to 11.6 billion yuan ($1.7 billion) and nearly quadrupled in the first quarter, its prospectus shows. Shares have quintupled over the past year.

Innolight's business skews toward the U.S., and customers like Meta META.O and Nvidia NVDA.O, because that is where advanced AI infrastructure is concentrated. In China, tech giants such as Alibaba 9988.HK, Tencent 0700.HK and Baidu 9888.HK are technologically restricted to a different architecture by Washington’s semiconductor export controls. Since they have limited access to cutting-edge semiconductors from the U.S., their datacentres don't need as many sophisticated transceivers. Some 62% of Innolight’s sales were in the U.S. in the first quarter, versus less than 4% in China.

The geographical split could prove a problem if Washington decides to curb Big Tech’s use of Chinese suppliers, though that doesn't look imminent. Washington last month added Innolight to a 1260H list of "Chinese military companies" that it says contribute to China's defence industrial base. For now, this label is largely toothless, besides restricting Department of Defense procurement from listed entities. It hasn't stopped blue-chip investors piling into Innolight, nor the company from working with U.S. banks Goldman Sachs GS.N, Morgan Stanley MS.N and Citigroup C.N.

That China's tech giants, Alibaba and Tencent, are also investing in Innolight's Hong Kong listing suggests the company could grow faster in its home market too as the People's Republic's chipmaking capabilities advance. In the race between the U.S. and China to dominate AI models, Innolight's listing shows hardware – even Chinese hardware – can be on both sides.

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CONTEXT NEWS

China's Zhongji Innolight, a ​manufacturer of optical transceivers, is seeking to raise $7 billion in a Hong Kong listing. The company will sell ​shares at a price of HK$1,010 ($129) each, according to a filing on the Hong Kong stock exchange on July 22, representing a 23% discount to the price of their Shenzhen-listed A-shares at market close on July 21.

Innolight makes optical transceivers, small devices that turn electrical signals into light signals and back again. They help move large amounts of data through fibre-optic cables and are used in data centres, cloud networks and AI ​computing systems.

The U.S. Department of Defense included Innolight on its “Chinese military companies” list in an update released on June 8.