As Trade Tensions Linger, China ETFs Remain Hot

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Trade tensions between the U.S. and China, the world's two largest economies, are intensifying, but some market observers believe a full-blown trade war is likely to be averted. Avoiding a trade war would likely be beneficial to China stocks and China ETFs, including the iShares China Large-Cap ETF (NYSEArca: FXI) and the iShares MSCI China ETF (NYSEArca: MCHI).

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“Trade tensions between the U.S. and China have broad economic implications that go beyond bilateral trade. Our base case is that they will not escalate into a trade war,” said BlackRock in a recent note. “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.”

China is on a path toward an ambitious reform agenda focusing on the quality of growth instead of relying on quantity, including environmental protection, continued cuts to excess capacity and reducing excessive credit growth.

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Avoiding a Trade War With China

The U.S. is pressing China to cut restrictions on financial businesses, notably Beijing’s requirement that they operate as joint ventures under which U.S. companies are limited to 51% ownership.

“The U.S.’s new transactional trade approach runs counter to the rules-based global trade system it has long championed–and is a key risk to the global economy and markets,” according to BlackRock. “A trade war would likely have a knock-on impact on confidence and hurt emerging market (EM) exports, which stand to benefit from a business spending recovery underpinning global trade.”

Beijing is willing to hold talks with the United States to settle trade disputes in what observers perceived to be an attempt to avoid a damaging trade war. The U.S. floated plans to enact tariffs, investment restrictions and other measures aimed at addressing the $375 billion merchandise trade deficit with China, which destabilized global markets last month.

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“Yet recent U.S. negotiating tactics have followed a consistent pattern: headline announcements spooking markets, followed by compromises and narrow implementation,” said BlackRock. “Most major U.S. trading partners are now exempt from what were initially global steel and aluminium tariffs. U.S. President Donald Trump’s tariffs on Chinese goods triggered another bout of market volatility. Yet the order contained no immediate action and left the door open for talks.”

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