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What China ETF Investors Should Watch for in Trump-Xi Summit

U.S.-China relationship has been in the spotlight since Trump’s election win in November given the volley of verbal attacks made by Trump toward China’s trade practices. Investors thus must be waiting with bated breath to see what comes out of the meeting between Trump and Chinese president Xi Jinping later this week.

Investors should note that China stocks fell into the questionable spot after Donald Trump’s win. This is because Trump is expected to take stricter steps on outsourcing, which China hugely depends on.

In such a situation, below we highlight the factors that China ETF investors should look out for in the Trump-Xi summit.

Trump’s Softer Tone Toward Protectionist Views or Use China Policy?

Trump even threatened imposing a 45% tariff on Chinese imports. But his administration’s tone turned softer lately on several key protectionist issues. Investors thus do not expect too many threats to the outsourcing issue and the Chinese economy as a whole (read: Trump Trade Advisor's Comments Boost Mexico ETFs).

If this was not enough, Trump’s conformity to the "One China" policy on Taiwan, also lessens chances of political overheating. One China includes the U.S. government’s recognition that the island of Taiwan is actually part of mainland China (read: What is Driving Asian ETFs Higher?).

Instead, Trump might seek more openness to Chinese markets. China levies a 25% tariff on car imports which can be asked for more tolerance. Also, analysts believe that service sectors like finance, social media and transportation, which are now restricted, might seek openness.

Talks on China’s Currency Not Likely

Trump frequently indicated that China devalued its currency against the greenback to enjoy unfair trade advantage. The comments were probably rooted in China’s shocking currency devaluation move in mid-2015 (read: 3 Country ETFs Impacted By China Currency Devaluation).

However, since then, several changes have taken place on the global economic front. In fact, the Chinese renminbi has actually strengthened 0.83% against the U.S. dollar so far this year (as of April 4, 2017).

Also, in mid-March, China’s central bank hiked borrowing costs, which was a move against currency devaluation and hints at a stable economy. Analyst believes the China has implemented several measures to restore yuan against the greenback to contain capital flight, in the wake of Fed policy tightening. Also, China “opened up the domestic bond market and the fund management sector to foreign companies”.

The strengthening of yuan against the greenback before the summit gives Xi Jinping an edge over Trump and may put off currency talks for now. WisdomTree Chinese Yuan Fund CYB and Global X China Financials ETF CHIX can be on investors’ radar on this front.

Any Trade Pact on the Way?

Heightened and overheated talks about China’s trade advantage may also not be a high point of the meeting. This is because the U.S. trade deficit declined considerably in February as imports from China dropped by a record amount and U.S. exports grew for three months in a row.

Some analysts are of the view that China may agree to unveil more sectors to U.S. companies and plans to be part of Trump’s $1 trillion infrastructure spending in return. As per Bloomberg, the Trump administration is apprehending that Chinese investors may try to buy Westinghouse Electric Co.’s nuclear business for which U.S. officials are searching an American buyer so that no nuclear technological secrets can be leaked.

Overall, Global X China Materials ETF CHIM and Global X China Industrials ETF CHII may gain from the turnaround in China’s manufacturing sector and if that country manages to carve a stake in Trump’s spending plan.

Move Against North Korea’s Missile Activity

North Korea launched a ballistic missile just before the meeting to show its antagonism over annual military drills between U.S. and South Korea. North Korea views these drills as trials before invasion. North Korea’s recent missile launches on test purpose triggered concerns over safety in South Korea and Japan. Washington will likely want Beijing as its ally to tackle North Korea.

China makes up about 90% of North Korea's international trade and the latter’s coal exports are a huge source of cash. As a result, Trump may want Xi Jinping to press on North Korea on nuclear weapon issue using American economic influence. However, any developments on this matter may move South Korea ETFs like iShares MSCI South Korea Capped ETF EWY (read: Will North Korea Spell Trouble For These ETFs?).

Bottom Line

Overall, things do not seem as complicated as it looked during the campaign. While no material changes are expected very soon as both parties would weigh their options, the above-mentioned funds are likely to be in focus on the Trump-Xi summit.

Investors should also take note of KraneShares Zacks New China ETF KFYP as it focuses on social and economic development initiatives of the Chinese government and will be reflective of whatever happens in the meeting.

Notably, KraneShares CSI China Internet ETF KWEB and Guggenheim China Technology ETF CQQQ can also move from talks on social security or any kind of technological pact (read: What Led China ETFs to Outperform in Q1 2017?).

Want to learn more about investing in China in today's uncertain economic environment? Check out our recent podcast for additional information:

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GUGG-CHINA TEC (CQQQ): ETF Research Reports
GLBL-X CHIN MAT (CHIM): ETF Research Reports
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