Contrary to the scholarly wisdom of the 1950's and early 1960's that predicted the processes of modernization and rationalization would gradually undermine it, ethnicity is a worldwide phenomenon of increasing importance.
(A) would gradually undermine it
(B) to be a gradual undermining of it
(C) would be a gradual undermining of ethnicity
(D) to gradually undermine ethnicity
(E) gradually undermining it

I am having a problem with usage of 'it' as a pronoun before the adjective 'ethinicity'. If such constructions are valid then are they treated as exceptions to pronoun useage? Can an expert throw light on this.

answer after discussion..