More likely this will create another HarmonyOS moment, where Huawei had to come up with a replacement for Android.

Chinese industry and government will start to invest heavily on a homemade CPU architecture.

And just by the force of the sheer numbers of their internal market + strict protectionism, they can succeed.

They can succeed in the internal market using the same government assistance and non market forces they always have. The question is the global market and will the Chinese firewall seal them inside.

The global market needs China, in order to be profitable, and to succeed.

I wonder if China will say that the manufacturing of all ARM devices in China will be illegal. Then those companies will scramble to shift their manufacturing out of China, thereby increasing their own costs for everyone, then bankrupting themselves in the process.

Eh, the global market succeeded and was profitable back when China was almost entirely sealed off from the world. The global internet market succeeds and is wildly profitable despite being mostly locked out of China by the firewall.

I wonder if China will say that the manufacturing of all ARM devices in China will be illegal.

CPUs aren't manufactured in China to begin with. Ditto for many other of the complex components of electronic devices. China handles final assembly and the parts that are easier to make.

If you're proposing China forbidding the manufacture of any electronic device that contains an ARM core anywhere physically inside it, sure, they could do that. They'd gut their own economy and risk an uprising given how much their "legitimacy" relies on economic success. Assembly of electronic devices is easily moved around, some of it is already moving to cheaper places like Vietnam simply because Chinese labour has been getting more expensive over time as the country develops. Which is cheaper: packing up and relocating a factory to a country with lower labour costs and a significantly less aggressive government, OR, redesigning your entire product and (for phones/TVs) breaking compatibility with huge numbers of your apps to strip out ARM in favour of something significantly less performant? Moving the factories will always win that comparison.

Only if they are willing to rewrite or reinterpret laws, but then again this is the CCP, they "interpreted" a part of Hong Kong's basic law to mean opposite to the literal text.

Well then they just go with Mips or RiscV, probably the way to go for other Hardware manufacturers too (Hello Apple)

Apple has a perpetual license to the ARM ISA, this sale does not affect that.