My understanding of the index concept based on weighted averages is that as an investor we are agnostic about any one investment in the index. There is no judgement being made other than diversity. One of the theories that supports indexing is based on diversifying your investments over the worlds capital markets.
For example, if the China stocks were removed from the index tomorrow I and others would probably not notice the change in our total values because other changes would outweigh it.
As such it is not a contradiction to desire the failure of the China companies and at the same time for the index to hold those shares. If those companies went bankrupt, other companies would take up the slack.
Of course, that all makes sense.
The ethical aspects are mainly the responsibility of the investment managers. But still, the client investors shouldn’t turn a blind eye as to what’s in their portfolio.