President Joe Biden's administration has confirmed that the rule will remain in place for the next decade, and the announcement forms part of the government's ambition to help the local semiconductor industry.
Gina Raimondo, the US Commerce Secretary, said: "We're going to be implementing the guardrails to ensure those who receive CHIPS funds cannot compromise national security ... they're not allowed to use this money to invest in China, they can't develop leading-edge technologies in China ... for a period of ten years.
"Companies who receive the money can only expand their mature node factories in China to serve the Chinese market."
Business groups in the US have recently urged the government to help reduce the reliance on China.
The latest move comes amid a long-running trade battle between the US and China, which are the world's two biggest economies.
However, Dan Ives of Wedbush Securities, a private investment firm, has warned of the potential dangers of the Biden administration's approach.
Ives suggested that it could lead to a further escalation of tensions between the countries.
He told the BBC: "This is really a shot across the bow at China and it's really going to fan those flames in terms of geopolitical (tensions)."