The Chinese semiconductor industry is going to happen no matter what; it is one of their strategic priorities and they have been moving in this direction for a long time.
This is about making it harder and inflicting some pain on them.
The effect will be the exact opposite, it will make it harder and will inflict some pain on them in the short term, but in the longer term any internal resistance has just evaporated and they will double down on this.
More importantly this will also encourage non Chinese nations to assist in any move away from US power over the semiconductor industry.
India has already started taking steps. It’s likely the Europeans will as well now.
The US government is taking these actions with blinders on. They only seem capable of modeling effects 6 months into the future and only the direct impacts on China (and barely even that, considering how poorly their entire tariff wars have gone, with the US basically having got nothing so far). The reality is that there is an entire planet’s worth of other countries also watching the US lashing out. Especially American allies who have been directly attacked by the US government over the past couple of years, that are now convinced they need to start steadily moving away from US influence.
If "Europe" stops sitting around with its dick in its hand and actually subsidizes/incentivizes development of a globally-competitive domestic semiconductor industry, I will be shocked. India, too, is hopelessly reliant on the US semiconductor technology ecosystem.
What is increasingly clear is that both the US and China see domestic leading-edge semiconductor production capacity as a core national security interest. It is not so easy to assist China's project; serious moves to help China establish independence in semiconductors will cause cascading changes in the relationship with the US. While they may be disquieted by recent US behavior, western European leaders can see perfectly well that China is not a viable strategic partner and that the risks and costs of being kicked out of the US security and trade umbrella (this stupid trade war with the EU is peanuts to the kind of coercive tariffs and sanctions looming in such a case) outweigh the benefits of helping China make better semiconductors.
China has finite resources to throw at this problem and their track record so far is less than stellar. There is a lot of concern that pursuing this now is wasting resources better put to use elsewhere. But now the nationalists will be able to point to this and say 'see, we were right all along, now we need to make up for lost time' and then they'll demand even more resources.
Which is interesting because it probably (not 100% sure about that) wasn't a resource issue to begin with (see below), the amount of money thrown at this so far has resulted in precious little in terms of concrete returns.
China is still stuck at 28 nm and a rough 6% or so of global capacity, technologically that's well over a decade behind TSMC, Samsung and GF, they also almost exclusively sell into their own market.
Whether this will be the push they needed to start moving remains to be seen but it will certainly add to the total weight of evidence that independence from US controlled manufacturing is a strategic goal.
It may also cause them to become more serious about Taiwan being a 'part of China' which may result in the longer term in the US shooting it's own foot. That would be a major game changer, TSMC is 50% of the global chip production.
From what I know about this the major roadblock from a tech perspective is the gear required to set up the fabs, specifically EUVL equipment, which is not the kind of equipment you make from scratch without having seen the intermediate stages. To what extent more money will be able to accelerate this is the big question.
This December '19 CGTN (I know, I know) article[0] says 16%
“China currently produces over 16 percent of silicon chips. To compete for semiconductor leadership and make its economic relationship with emerging economies easier, China plans to produce 70 percent of all semiconductors it uses by 2025.”
And this March 2020 Daexu Consulting article[1] pegs China's semiconductor consumption at ~60% (!) of the world's total, but notes “However, domestic Chinese manufacturers are still only capable of meeting approximately 30 percent of their own demand.” ~60%÷10×3 = ~18% which jibes with that 16% back there.
This is most of all forcing a build-up of Chinese semiconductor industry independent of the USA. So not using any USA IP, software or anything. It forces China to build anything they need vs. buying it abroad.
This is about making it harder and inflicting some pain on them.