Unlocking growth: Emerging markets beyond China

When it comes to passive investment into EM, China has a large gravitational weight. It makes up just under 30% of the MSCI EM Index (up from 20% a decade ago), and more than half of the index’s 1,206 names.¹ Yet looking at China’s significance in global markets, it makes up just under 3% of the MSCI All Country World Index.²

At the same time as China’s significance as a part of EM has risen, its growth has been challenged by various factors, including ongoing trade conflicts with the US and structural transitions taking place in the domestic economy. In the longer term, China’s share of working age population has also been declining since 2010.³

Combined, these short and long-term headwinds have contributed to lackluster performance in Chinese equities on a relative basis in the post-pandemic years, as seen in the chart below.

China’s performance has decoupled from the rest of the world

Source: BlackRock as of 11 April 2025. United States refers to S&P 500 Index, Developed Markets ex US refers to MSCI World ex USA Index, Emerging Markets ex China refers to MSCI Emerging Markets ex China Index, China refers to MSCI China All Shares Index. Index performance returns do not reflect any management fees, costs or expenses.

While China has also seen its fair share of positive momentum in 2025 - in particular around AI where DeepSeek’s low-cost model may prove transformative for the Asian technology sector – in the long term, this performance divergence suggests China may need to be viewed in a different way by investors. This is why we’ve seen increasing interest in segmenting China from the rest of EM, so investors can dial their exposure up or down depending on the risks.

Emerging market economies are positioned to benefit from some of the key ‘mega forces’ driving the lion’s share of growth opportunities in today’s investment landscape.

Perhaps the most dominant of these forces is AI, where Taiwan is a leader, with almost 15% of its GDP coming from technology and the locally-headquartered Taiwan Semiconductor Manufacturing Company currently the world’s largest producer of semiconductor chips.⁴ Having recently announced a deal to manufacture more of its chips in the US, as well as indicating its willingness to remove all tariffs with the US, Taiwan is likely to be relatively insulated from tariff-related growth shocks.

With geopolitical fragmentation on the rise and the global economy splitting into competing blocs, markets such as commodity-rich Brazil - with its valuable resources and supply inputs, as well as a diverse export base across Asia, Europe and the Americas - are well-positioned to benefit.

Finally, we think demographic change will also play a role in long-term economic growth as markets with younger, working-age populations claim an advantage. With India set to overtake China by 2030 in terms of the percentage of its total population that’s working age, we expect demographics, as well as moderating inflation and supportive monetary policy, to act as a tailwind for India's economy.

We think demographic change will also play a role in long-term growth as markets with younger populations claim an advantage, and with India set to overtake China by 2030 in terms of the percentage of its total population that’s working age, we expect demographics to act as a tailwind for the region.⁵

Asia working age populations

Source: LSEG Datastream/Oxford Economics/BlackRock Investment Institute, 5 May 2025

Looking at the economies that make up the EM ex China index as a whole, while they garner around 70% of their revenue from other EM markets (including China), the slowdown of growth in China has been somewhat of a positive force for these economies. Disinflationary forces have meant central bank authorities are more inclined to cut interest rates, in comparison to developed markets which have faced higher rates in recent years.

This combination of positive macro forces has been reflected in the strong long-term outperformance of the MSCI EM ex China Index over the broad EM index. Over three, five and 10 year timelines, EM ex China has outperformed broader EM by between 1-4%.⁶

Over this period of strong returns, we’ve also seen investors voting with their feet when it comes to investing in emerging markets beyond China. Globally, iShares has seen around $12 billion cumulative flows into its EM ex China ETFs since 2021.⁷ In Australia, the iShares EM ex China ETF (EMXC) has taken in more than $163 million so far this year, placing it in the top 10 ETFs for 2025 on an inflow basis.⁸

A modular approach that splits EM and China allocations allows investors to more nimbly pivot as tactical opportunities arise. One option is to replace the traditional EM exposure with a proportionate combination of China and EM ex China exposures⁹, which resembles the broader EM index but provides a ‘lever’ to over- or under-weight China based on the market outlook. Using ETFs as building blocks, it’s easy to take this approach while keeping portfolio costs low, and taking advantage of the liquidity of the ETF structure to respond rapidly to market events.

Depending on your own investment views, it’s possible to adjust and blend your allocation to EM economies through a combination of broad EM, EM ex China, Chinese equities and EM fixed income. With macro forces likely to lead to decidedly different outcomes for China versus the rest of EM, we believe having the ability to be more dynamic and selective with opportunities across these markets could be valuable.