Are SMEE and ASML really competitors though? Sure both companies aim to create products that perform the same tasks/functions, but they do not truely compete across all markets. An analogy would be two fishermen selling their fish in different towns. If the customers won't travel to another town to buy fish, then the fishermen are not competitors. Fabs outside of China are not aiming to buy SMEE lithography equipment and fabs inside China are now strongly incentivized to buy SMEE/domestic where possible due to sanctions risks. In the long run neither SMEE or ASML will be threats to each other because there will be a strong split in customer preference for one or the other that is not dictated by just product quality.
The situation from my perspective is more similar to joint venture ICE car factories in China. Foreign car manufactures like Volkswagen, Buick, Honda, etc have made a massive amount of money from setting up factories in China and selling cars from those factories only in China. It is no simple coincidence that China is the world's largest car producer, but only ranked 16th in car exports. Likewise ASML can sell lithography tools in China with the implicit understanding that SMEE and similar companies will almost certainly not be exporting outside of China in the near or medium-term (10+ years) future.
The vitriol in the comments are more likely the fallout from the US-China rivalry. The previous US government put lithography tool sanctions as a highlight of their foreign policy and politicized the issue. Does anyone truly care about Buick manufacturing cars and competing against Great Wall Motors in China? So why do people care about ASML selling lithography tools and competing against SMEE in China? Buick knows Chinese cars are not going to be exported to the US and ASML also knows that SMEE lithography tools won't be exported to fabs outside China.