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China’s move to restrict the export of fentanyl precursors might have far-reaching consequences well beyond pharmaceutical and law enforcement circles. The cutdown, part of a trade deal reached between Xi Jinping and Donald Trump last month, represents a thaw in U.S.–China relations that could brighten the outlook for China-focused and emerging-market ETFs.
Beijing added more than a dozen synthetic opioid ingredients to its list of controlled exports to the U.S., Mexico, and Canada – an apparent attempt to meet Washington halfway on curbing the fentanyl crisis. The Trump administration also cut tariffs on Chinese goods in half to 10%, effective Monday, easing a key trade irritant. A reciprocal suspension of port fees and maritime probes between the two countries also points to broader cooperation in stabilizing trade flows.
To investors, this could be the turning point when attitudes toward Chinese assets finally shift, aided by diplomatic overtures that help cool a years-long chill in trade relations.
The most direct beneficiaries of easing tensions could be China-focused equity funds that have suffered a love-hate relationship with investors over recent years. If tariff relief boosts corporate earnings, the iShares MSCI China ETF (NASDAQ:MCHI), which has seen more than $1.2 billion in inflows over the past six months, according to aggregated data from ETF Database, may see renewed inflows, as it provides broad exposure to large- and mid-cap Chinese companies.
Likewise, the KraneShares CSI China Internet ETF (NYSE:KWEB), home to giants like Alibaba Group Holding Ltd (NYSE:BABA) and Tencent Holdings Ltd (OTCPK: TCEHY), could benefit after improved U.S.-China relations ease the pressure on Chinese tech names long targeted by delisting fears and regulatory scrutiny.
Other winners could be the Invesco Golden Dragon China ETF (NASDAQ:PGJ), which tracks U.S.-listed Chinese companies, and the SPDR S&P China ETF (NYSE:GXC) as investors bet on a gradual normalization of trade and investment ties. Meanwhile, stabilization in global trade could boost transportation and logistics-focused ETFs such as the US Global Sea to Sky Cargo ETF (NYSE:SEA).
Outside of China, the iShares MSCI Emerging Markets ETF (NYSE:EEM) and Vanguard Emerging Markets Stock Index Fund ETF (NYSE:VWO), for example, are heavy on Chinese holdings and would also tend to benefit from a broad-based rebound in risk appetite.
Still, optimism should be tempered by structural concerns: China’s property slowdown, subdued consumption, and regulatory unpredictability persist. Yet for ETF investors who have been waiting for a diplomatic thaw to re-enter the world’s second-largest economy, Beijing’s fentanyl crackdown might be the olive branch signaling it’s time to take another look.
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Photo Courtesy: Alessia Pierdomenico on Shutterstock.com
