China today is a huge consumer economy. Largest relatively uniform group of consumers in the world. With vast spending power. So is it that surprising that companies are showing up to create products specific to that market? And that they manufacture those products in China? Using Chinese components?
Then there is the vast state support that the Chinese government, both central and local, gives for building an electronics fab. You might claim those are market distorting subsidies. But other countries in the Far East like Singapore have similar policies. And now the US has the CHIPS Act. Which even forces companies which sign up for it to abandon the idea of opening new fabs in China altogether. If China went to the WTO with a court case on that I can bet on who would win. None of the Chinese incentives are anti-competitive like that.
Chinese fabs had grown their clientele portfolio quite a bit. SMIC for example raised cash on the Chinese stock market to fund expansion into newer processes. However the US torpedoed that expansion by denying China the acquisition of EUV machines. The thing is a leading edge EUV fab costs like 2x the price of an older generation DUV fab. Which the US also denied them buying machines for. And 28nm DUV fabs are probably like 4x cheaper than EUV. So with all that cash from the stock market guess what SMIC is plowing their money into? Instead of building a single EUV fab they are building four DUV ones for 28nm.
The US now claims the market for old chips is saturated. But yet just last year everyone was talking about the lack of older generation chips, and that there weren't enough old chips to make cars, etc. Everyone is now building fabs for older chips. China, Japan, Taiwan, Europe, and the US. Also, by threatening to cut China from Western chips entirely, the US just gave the Chinese economy the extra push to vastly expand their own facilities as quickly as possible. So the US government is just reaping what they sowed.
As for the notion they can stop the Chinese from making 28nm chips. Good luck with that. In two years tops the Chinese will be able to make their own machine tools, and they won't even need to buy them from the West anymore. The US is like 10 years too late to this party. If they wanted to cut China from chips then they are just way too late.
And China can retaliate to Western sanctions on chips in several ways. The US does not even know what shit they put themselves into. Nearly all the PCBs today are made in China. A significant amount of the world's DRAM and NAND is also made there. Plus several critical materials. The US is quite lucky the Chinese did not decide to pay them back in kind yet.