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Nvidia Corp’s (NASDAQ:NVDA) uneasy dance between Washington and Beijing is quickly becoming a market-defining saga for China-focused tech ETFs. The chipmaker is gearing up to ship its new AI chip, likely to be called the B30A processor, next month, according to a Reuters report. This new product will be a China-specific artificial intelligence chip based on its Blackwell architecture. It is an indication of Nvidia’s resolve to stay relevant, competitive and diplomatic in one of its most important markets, even as the U.S. government has slapped a 15% revenue tax on its China sales.
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Notably, Nvidia had expected relief in July when Washington removed restrictions on its H20 chip. But Beijing’s reaction has been decidedly cold. Reports by Bloomberg The Information indicate that Chinese regulators told leading tech firms, such as Alibaba Group Holding Ltd (NYSE:BABA), Tencent Holdings Ltd (OTCPK: TCEHY) and ByteDance, to halt the procurement of H20 on the grounds of national security. Even officials have called for restraint in embracing foreign semiconductors for sensitive use, citing long-standing concerns about “backdoors” or spying features, something Nvidia vehemently rejected.
This blowback throws a monkey wrench into Nvidia’s China plans. It sends huge ripple effects for investors who own China technology ETFs, specifically the KraneShares CSI China Internet ETF (NYSE:KWEB) and the Invesco China Technology ETF (NYSE:CQQQ).
Both CQQQ and KWEB are strongly skewed towards the very platforms that are embroiled in Beijing’s crackdown.
KWEB’s largest holdings are Tencent (~10.7%), Alibaba (~8.6%), PDD Holdings Inc (NASDAQ:PDD) (~7.5%), Meituan (OTCPK: MTNGF) (~6.2%), and JD.com Inc (NASDAQ:JD) (~5.2%).
CQQQ’s largest holdings are Tencent (~10.0%), PDD (~8.1%), Meituan (~6.9%), and Baidu Inc (NASDAQ:BIDU) (~6.2%).
In both instances, approximately 40% of the portfolio is invested in companies that rely heavily on sophisticated GPUs to power their artificial intelligence algorithms, cloud computing platforms, and consumer applications. Disruption of supply for Nvidia’s chips thus has straightforward implications for the growth prospects of these ETFs.
In the near term, deferment of H20 buys could push back deployment of AI and decrease traction for cloud services. That might weigh on Alibaba and Tencent’s earnings, as well as those of other platform giants, posing a downside risk to ETFs like KWEB and CQQQ.
On the other hand, if Nvidia manages to regain favor with China through its B30A, it will bode well for Chinese tech giants that rely on Nvidia chips for AI-based developments and deployments. This, in turn, will bode well for KWEB and CQQQ.
Over the longer term, however, Beijing's message is clear: domestic self-sufficiency is the priority. By pressuring firms to lean on Chinese alternatives such as Huawei's GPUs, regulators are accelerating the pivot toward a homegrown supply chain. Although Chinese GPU makers still lag Nvidia in scale and capability, state-backed funding and policy support could gradually close the gap.
For ETF investors, this structural shift means that KWEB and CQQQ will potentially transform from proxies for consumer internet expansion to gauges of technological independence in China.
Essentially, China tech ETFs, such as KWEB and CQQQ, appear to be in a win-win situation.
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