Market Overview

China ETFs Dealing With Trade Tensions

China ETFs Dealing With Trade Tensions

Trade tensions between the United States and China, the world's two largest economies, are roiling global equities, but some exchange-traded funds tracking Chinese stocks are remaining firm this year. The iShares MSCI China ETF (NASDAQ: MCHI), one of the largest US-listed China ETFs, is modestly higher on a year-to-date basis.

While Chinese stocks are attractively valued and under-owned by some asset allocators, “a deterioration in trade relations with the United States remains a risk and with a medium-term view,” according to BlackRock.

The $3.36 billion MCHI tracks the MSCI China Index and holds over 150 stocks, the bulk of which are large- and mid-cap names.

Trade Tensions, But Not A Trade War

BlackRock notes there are trade tensions between the U.S. and China, but the asset manager and parent of iShares expects a full-blown trade war will be averted.

“We see the trade actions implemented so far as limited and unlikely to derail the benign economic and market backdrop–as long as they do not worsen into a trade war that could harm global growth prospects,” BlackRock said in a recent note.

The U.S. has good reason to avoid a trade war with China because the effects of such a move could be felt throughout the economy.

“The U.S. supply chain is much more homegrown. U.S. tariffs on China–and any resulting retaliatory measures–could cause widespread economic fallout by affecting such global supply chains if tensions escalate,” according to BlackRock.

What To Expect

Trade announcements from the Trump administration have frequently started out on the brazen side only to give way to compromises.

“We expect that China will negotiate to avoid a trade war, as it would challenge its growth outlook and undermine policy priorities such as deleveraging,” said BlackRock.

Investors appear comfortable wagering U.S.-China trade tensions will ease. In the first quarter, investors allocated over $504 million in new capital to MCHI. The ETF allocates 40.55 percent of its weight to technology stocks, a group that would benefit from avoiding a trade war.

Tencent Holdings Ltd. (OTC: TCEHY) and Alibaba Group Holding Ltd. (NYSE: BABA) combine for almost 31 percent of MCHI's weight.

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