From the story, it appears that a court was simply enforcing an existing legislated ban on exports for military uses. Courts go by what the law says, and so if the consequences are bad, politicians will have to amend the law; it's not fair to criticize the body that directly imposed the specific sanctions.
However, shortly after I read this, I found out from a Google search that China was coming out with a supercomputer which consumed 1.1 megawatts to provide one petaflop of computing power, using homegrown Shenwei 1600 processors, made on a 65nm processs. I was amazed that they reacted so quickly in the expected fashion to this!
Then I searched for more information, took a closer look at the results, and found that this story was from November of 2011. Apparently the processor may use the MIPS instruction set, although its internals are said to be based on studying a DEC Alpha.
This means China indeed has a capacity for going homegrown, but also that it would try this without our encouragement - and that they are sufficiently behind in technology that sanctions will still slow them down.