In the last 20 years, 3 things happened that dramatically increased importance of chips but couldn’t have been predicted in early 2000s:
1) the rise of smart phone demands advanced processes and IoT/smart device demands quantity.
2) big data boosted server demands
2) AI boosted GPU/AI chip demand.
China in the last 20 years had a balanced allocation of budget for various developmental needs. China successfully upgraded to mid-tier manufacturing and made many scientific breakthroughs (space, transportation, energy, etc). China had to build (infrastructure, edu, healthcare, etc) rather than simply maintain the old like developed nations. Overall I think China spent the limited budget wisely to get the highest return for the economy. Chip making is generally not that profitable. Remember, the USSR was technologically very advanced but failed to develop a sustainable economy.
Last and most uniquely related to China’s current chip vulnerabilities, anyone lived through China in early 2000s know that 20 years ago nobody in their wildest dream could have predicted China would become a near peer competitor of the US in such a short time. People rightfully assumed China would have more time before the gloves are off in this competition.
All in all, we probably shouldn’t use our post-hoc wisdom to assign blames. Right now might not be a bad time to face this vulnerability. Too early China might not have accumulated enough to catch up. Too late China could be totally screwed and missed the opportunities of a lifetime (large auto chips and smart device market to ease into the industry)