The Implications of The China Fund's Liquidation for Emerging Market Fund Strategy

The liquidation of The China Fund (CHN) in October 2025 marks a pivotal moment in the evolution of emerging market (EM) investing. Approved by shareholders after a board-led review of geopolitical risks, market conditions, and competitive pressures, the decision to dissolve the fund reflects a broader shift in investor sentiment toward Chinese assets. As the fund prepares to distribute its portfolio to shareholders, the ripple effects are already reshaping EM fund strategies, with a growing emphasis on "EM ex-China" allocations. This reallocation underscores a critical divergence between China and other EM economies, driven by structural, geopolitical, and regulatory factors.

A Tectonic Shift in EM Allocation Logic

The China Fund's liquidation was not an isolated event but a symptom of deeper market dynamics. According to a report by MSCI, , , highlighting a stark performance gap, as noted in a Goldman Sachs analysis. This divergence is attributed to China's regulatory crackdowns, property-sector stress, and U.S.-China trade tensions, which have eroded growth premiums and increased volatility, according to an ETF Database analysis. Meanwhile, EM ex-China markets-particularly India, Brazil, and Southeast Asia-have benefited from global supply-chain reshuffling, commodity demand, and demographic tailwinds, as the Goldman Sachs analysis also notes.

Investors are now treating China and EM ex-China as distinct asset classes. As noted in a 2025 ETF Trends analysis, the correlation between China and other EM markets has fallen to its lowest level in over two decades, reducing the diversification benefits once assumed in traditional EM portfolios. This decoupling has prompted a strategic reallocation of capital. For instance, , signaling a structural shift in fund flows, according to the ETF Database.

Strategic Reallocation: Winners and Challenges

The beneficiaries of this reallocation are clear. India, with its strong consumption and technology sectors, is projected to become the fastest-growing major EM economy, per ETF Database reporting. Brazil and Southeast Asian nations like Vietnam and Indonesia are also gaining traction, supported by nearshoring trends and favorable demographics, the Goldman Sachs analysis suggests. Meanwhile, structural reforms in the Middle East and parts of Africa are creating long-term investment opportunities, the Goldman Sachs analysis also notes.

However, the shift is not without risks. Excluding China entirely can lead to overconcentration in specific countries, reducing the diversification that EM investing traditionally offers, as a Morningstar report warns. For example, India's rising prominence has led to concerns about single-country exposure, prompting some funds to adopt a balanced approach that retains partial China exposure while emphasizing EM ex-China opportunities, Morningstar notes. Active management is increasingly seen as essential to navigate these complexities, allowing investors to adapt to geopolitical uncertainties and varying economic fundamentals across regions, ETF Trends argues.

The Role of Active Management in a Fragmented Landscape

The liquidation of The China Fund has accelerated the case for active management in EM portfolios. Passive strategies that once relied on broad EM indices are being replaced by more granular approaches. As Morningstar notes, the appeal of EM ex-China strategies lies in their ability to capture distinct risk-return profiles while mitigating China-specific risks. This trend is particularly evident in Europe, where regulatory scrutiny of China-related ESG risks has further incentivized the adoption of ex-China strategies, the .

Yet, the success of these strategies depends on the ability to identify markets with strong fundamentals and growth trajectories. For example, Mexico's integration into North American supply chains and Indonesia's energy transition potential are attracting renewed interest, according to the Goldman Sachs analysis. At the same time, investors must remain vigilant about regional volatility, such as currency fluctuations and political instability, which can undermine even the most well-constructed EM ex-China portfolios, as ETF Trends warns.

Conclusion: A New Era for EM Investing

The liquidation of The China Fund is a harbinger of a broader transformation in EM investing. As China's role in global markets evolves, investors are redefining their strategies to reflect a more nuanced understanding of regional dynamics. While the shift to EM ex-China allocations offers compelling opportunities, it also demands a higher degree of selectivity and active oversight. The coming years will test whether this reallocation can deliver on its promise of enhanced risk-adjusted returns-or if new challenges will emerge in a fragmented and unpredictable EM landscape.