Let's analyze this from technical and geopolitical point of view.
From technical point of view banning ASML would make sense only if SMEE can guarantee enough production capacity to cover the 100% of the Chinese market, and if current customers of ASML are already independent from a maintenance / spare parts point of view. Otherwise it simply means to shoot itself in the feet.
Far better for China to allow SMEE to develop along with ASML: there is well enough space in the market for both of them. China does not need to ban ASML to make some foundries to buy SMEE when ready....China can and did it in different, more subtle ways already many times in the past.
Form geopolitical point of view such a decision IMO would be even dumber:
1. It would be a huge propaganda gift for US that can scare away companies from investing in China
2. It would be a huge blow to China credibility on the international theater, a blow that would not be possible to recover.
3. It would condemn not only SMEE, but all Chinese equipment manufacturers to being lock in the Chinese market forever because US would very easily succeed in banning them everywhere else (this is a real danger anyhow though).
4. Would make SMEE to become lazy and slow due to missing technical competition with a stronger actor (that is always useful in the long term)
5. Would force decoupling of Chinese semiconductor businesses from the world (huge loss for China in the long term from many, really many points of view).
I'm sympathetic to your point of view (or generally European position in this geopolitical struggle). I would say that if ASML does not resist US pressure and ban the sale of DUVs to China, it's entirely logical and reasonable to lock ASML out of China for the foreseeable future. Would you agree with that? And I think China needs to make that point clear to ASML and the Dutch government.
I think there is already a strike against ASML for not selling EUVs to China. But aside from that, ASML from what I've seen has been a good partner with Chinese firms. There is no reason to lock them out. But there should be encouragement of local firms, because of this constant geopolitical threat and the bowing to US pressure on EUVs. There are definitely ways that the central government can encourage SMIC and other chip producers to favor Chinese companies over ASML.
Geopolitically, I don't see how it would benefit China to cut out ASML even after SMEE or another firm figured out how to produce DUV and EUV. There are still rooms for a lot of cooperation and Chinese orders. But things need to be negotiated in a more even manner where ASML or any EU can't just arbitrarily sanction China because they got pressured by domestic politics or US/UK.
Long term, I think Europe can't really compete with US and China in these major future industries. It's unwise to just automatically dismiss EU as a partner. If China has it's own set of competitive technology that would benefit European society, I don't see why it can't use that to develop tighter relationship with EU.
