Is China Still Considered an Emerging Market?

Global financial markets categorize countries as developed, emerging, or frontier. These classifications help investors and economists understand the global investment landscape, providing a framework for assessing economic maturity, market efficiency, and growth potential. Understanding these distinctions is crucial for asset allocation and identifying broader economic trends.

Defining Market Classifications

Financial institutions, economists, and index providers classify countries as developed, emerging, or frontier markets. Developed markets have mature economies with high per capita incomes and advanced industrialization. Their capital markets are large, well-established, and liquid, supported by robust regulatory systems and stable governments.

Emerging markets are economies transitioning towards developed status, characterized by rapid economic growth and increasing global integration. While per capita incomes are growing, they remain lower than in developed nations. Their financial systems are evolving, often with less mature capital markets and varying market accessibility for foreign investors.

Frontier markets are the least developed economies, with smaller and less liquid financial markets. They often present higher risks due to less developed infrastructure, lower market efficiency, and greater political instability. Classification criteria include economic development, assessed by Gross National Income (GNI) per capita, and the size and liquidity of equity markets.

Market accessibility for foreign investors, including ease of investment, capital controls, and the regulatory environment, plays a significant role in classification. Institutional stability, encompassing governance, legal frameworks, and transparency, also contributes to a country’s market classification. Consistency and predictability of regulations are crucial for attracting and retaining international capital.

No single, universally agreed-upon definition or set of criteria exists. Entities like the International Monetary Fund (IMF) and major index providers may apply different methodologies, leading to variations in country categorization. These classifications are not static and undergo periodic reviews to reflect ongoing economic and market developments.

China’s Economic Profile and Market Characteristics

China’s economic profile is complex when assessed against traditional market classification criteria. Its Gross Domestic Product (GDP) reached approximately $18.77 trillion in 2024, positioning it as a major global economy. This substantial GDP size aligns with characteristics found in developed markets.

However, China’s GDP per capita remains lower than developed nations, recorded at around $13,306 in 2024. This income level is more indicative of an emerging market, reflecting ongoing development in living standards and economic maturity. The country’s financial markets have evolved regarding openness, though capital controls persist.

Initiatives like the Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) schemes, introduced in 2002 and 2011, have gradually opened mainland Chinese capital markets to foreign institutional investors. These programs, along with the Stock Connect schemes launched in 2014, facilitate cross-border trading between mainland exchanges and Hong Kong, increasing market accessibility. Recent reforms relaxed QFII/RQFII qualification requirements and abolished quotas, further easing foreign participation.

State-Owned Enterprises (SOEs) significantly influence China’s economy. SOEs account for approximately 25% of national GDP as of 2020 and dominate strategic sectors like telecommunications, energy, and banking. While their share in overall industrial output has declined, SOEs remain integral to the economy and influence financial markets and resource allocation.

China’s regulatory environment for financial markets balances state guidance with market-oriented reforms. The government guides economic development, prioritizing strategic industries and financial stability through oversight. Recent updates, such as the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors in November 2024, aim to attract more foreign investment by lowering minimum asset requirements and shortening the lock-up period for acquired shares from three years to one.

Despite these efforts, foreign investors must navigate a unique legal framework, including specific disclosure requirements and compliance with domestic regulations like the PRC Company Law and Securities Law. The market also exhibits volatility and unique operational considerations, common in rapidly developing economies.

Global Index Provider Classifications of China

Major global index providers influence how China’s market status is perceived and integrated into global investment portfolios. Providers like MSCI, FTSE Russell, and S&P Dow Jones Indices use specific methodologies to classify markets. Their decisions are based on criteria such as economic development, market size, liquidity, and market accessibility for foreign investors.

MSCI began including China A-shares—mainland Chinese stocks—in its Emerging Markets Index in June 2018. This initial inclusion started with a partial factor, meaning only a fraction of eligible A-shares were added, reflecting Chinese authorities’ efforts to improve market accessibility through mechanisms like Stock Connect. MSCI progressively increased the inclusion factor to 20% for large and mid-cap A-shares by November 2019, boosting China’s weight in the MSCI Emerging Markets Index.

FTSE Russell promoted China A-shares to Secondary Emerging market status, initiating phased inclusion into its global equity benchmarks from June 2019. This decision followed a review of China’s market reforms, particularly improvements in foreign investor access via QFII, RQFII, and Stock Connect programs. FTSE Russell’s phased inclusion brought China A-shares to approximately 6% of the FTSE Emerging Index upon completion of phase one.

Chinese government bonds began inclusion into the FTSE World Government Bond Index (WGBI) in October 2021, phased in over 36 months, acknowledging bond market reforms and increasing liquidity. S&P Dow Jones Indices added China’s A-share market to its S&P Emerging Broad Market Index (BMI), with a 25% partial inclusion factor taking effect in September 2019. This collective recognition by major index providers increased China’s representation in global benchmarks.

Inclusion decisions by these providers often highlight specific conditions, such as the need for improved liquidity, greater flexibility in foreign exchange execution, and streamlined settlement practices. While progress has been made, the ongoing nature of these classifications means market accessibility factors continue to be monitored. The evolution of these classifications reflects China’s gradual integration into the global financial system, shifting its weight within global investment universes.

Implications of China’s Market Status

China’s classification as an emerging market, and its integration into global indices, carries implications for various stakeholders. For global investors, this status directly influences asset allocation strategies and portfolio construction. Many institutional funds are mandated to invest a percentage in emerging markets, leading to capital flows into China as its weighting in these indices increases.

This inclusion offers global investors diversification opportunities, as China’s economic cycles and market performance may not always correlate with developed markets. However, it also necessitates a risk assessment, given the volatility often associated with emerging markets and China’s unique regulatory landscape. Fund managers must navigate factors like capital controls, state intervention, and operational considerations when allocating capital.

For international businesses, China’s market status impacts market entry strategies and foreign direct investment (FDI) decisions. As China’s markets become more open, foreign companies may find it easier to establish operations and access local capital. Recent reforms, such as relaxed ownership restrictions and streamlined investment processes, aim to attract foreign capital, influencing supply chain considerations and operational planning for multinational corporations seeking growth in the Chinese market.

China’s market classification influences its economic policy decisions and its role in global economic forums. The desire for further integration into global financial systems can motivate policymakers to continue market-oriented reforms, enhance transparency, and align with international standards. This strategic alignment can contribute to its standing in international discussions on trade, finance, and global governance, fostering economic cooperation.

The perception of China’s economic maturity and stability is shaped by these classifications. While still considered an emerging market, its growing influence in global indices elevates its profile, attracting attention from a broader range of investors and businesses. This evolving status highlights China’s economic transformation and its increasing weight in the global economic landscape, suggesting shifts in financial power dynamics.