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This study investigated the association between parenting distress and toddlers’ social–emotional problems and competencies and whether parent–child dysfunctional interactions mediated this association. Participants were 711 Chinese toddlers in family and center-based care. The results from structural equation modeling showed that parent–child dysfunctional interactions mediated the relationship between parenting distress and the four domains of toddlers’ social–emotional problems and competencies for both groups. However, the direct and indirect pathways differed between groups. For toddlers receiving center-based care, childcare services played a protective role in their social–emotional development by preventing parenting risk factors. This study suggests early center-based services for toddlers exposed to family risk characteristics such as parents’ poor mental health and interactional behaviors.