2025 was a turbulent year for China. The country began the year facing geopolitical headwinds and weak domestic demand. In April, new tariffs and trade frictions triggered some of the most significant trade actions in decades.
Yet by November, the story had changed. China’s annual trade surplus has surpassed $1 trillion, an all-time high. GDP growth remained stable, at around 5%. The country appears to have left concerns about “deglobalization” behind.
Also read:
Continues after advertising
What does 2026, the Year of the Horse, hold for China? Headlines may focus on Trump’s tariffs or real estate woes, but there are more subtle trends afoot that will shape China’s economic trajectory.
China presents new challenges for international business, especially in the face of confident local competitors, but opportunities still exist for disciplined global executives.
Five key questions will be decisive as the world’s second-largest economy navigates a rapidly changing global economy.
1. How will tariff uncertainty shape your China strategy?
China has long dominated global manufacturing, thanks to its cost competitiveness and integrated supply chains. This strength remains intact despite higher US tariffs in 2025, which have now stabilized around 50%.
The tariffs barely affected Chinese trade: the country’s share of global goods exports remained at around 14%, four times greater than that of India and Vietnam combined.
The reason is that China has already diversified its trading partners. Goods exports to the US represent just 2% to 3% of Chinese GDP, and more than half of China’s goods exports now go to economies in the Global South, including Asean (Association of Southeast Asian Nations), Latin America, the Middle East and Africa.
Continues after advertising
China also exports more knowledge-intensive goods, such as electronics and automobiles, and fewer labor-intensive goods, such as furniture and toys.
Beijing has bought itself some time, but 2026 will be the test of how resilient China’s export economy really is.
Trade patterns will continue to change, with analysis from the McKinsey Global Institute suggesting that up to 30% of global trade could change corridors by 2035. The trade map is being redrawn in real time.
Continues after advertising
Multinational companies with a presence in China need supply chain flexibility so they can reconfigure their operations as quickly as Chinese companies.
2. Where are Chinese consumers spending, and what does this mean for global brands?
Before the pandemic, Chinese consumers drove close to double-digit retail growth each year. In 2025, however, consumer confidence reached historic lows, youth unemployment hovered around 15% and the housing market remained stagnant.
Still, retail spending grew by around 4% to 5% in the first three quarters of 2025, year-on-year.
Continues after advertising
Chinese consumers are still spending — just on different things. Tourism spending rose 12% in the first three quarters of 2025, while movie ticket revenue jumped 22%.
Government subsidies supported double-digit growth in spending on electric vehicles and household appliances. Superfluous expenses had difficulties.
The opportunity for executives lies in accessing the voluminous level of savings held by Chinese families.
Continues after advertising
Consumers are expecting something worth buying, and the challenge will be to offer products and services that Chinese buyers find genuinely appealing.
Competing on price alone will not work; Only a compelling value proposition will unlock these pent-up savings.
3. Can your business survive and thrive in China’s hyper-competitive market?
China faces deflationary pressure even as the West struggles with inflation. In 2025, what the Chinese call “involution” accelerated, an intense competition that erodes margins in all sectors. About 30% of large industrial companies reported losses, up from 20% before the pandemic.
But the period of “excess capacity” may be waning. Investment in fixed assets slowed and then shrank, reflecting weaker spending in some sectors.
Rather than being a concern, the lower investment could signal that companies are pulling back from excessive expansion, correcting years of overinvestment that flooded markets and destroyed pricing power.
This adjustment, if reinforced by appropriate reforms, could eventually stabilize margins.
Companies now need to differentiate themselves by technology, brand and services, not just price.
It is important to note that success in China will lead to a competitive advantage elsewhere in the world.
Otherwise, competition with Chinese players could be brutally relentless — not just in their home market, but increasingly abroad as well.
4. Are you ready to face Chinese competitors outside of China?
China has been attracting foreign capital for decades. But over the past year, the country has become a growing source of investment.
Foreign direct investment (FDI) announcements in China between 2022 and 2025 fell by about two-thirds compared with the period between 2015 and 2019, in annualized terms.
Chinese FDI announcements abroad have remained stable, at around US$100 billion per year, but have expanded beyond the traditional destination of emerging Asia to newer markets such as Latin America, the Middle East and Europe.
Chinese companies are also becoming global exporters of culture. Pop Mart’s Labubu figures, blockbuster Black Myth: Wukong and Chinese electric vehicle brands have captured global audiences.
This reflects a growing form of commercial “soft power” as Chinese culture, lifestyle trends and consumer brands penetrate markets.
In 2026, expect to face Chinese competitors on its own territory. Markets in the Global South, with younger and increasingly affluent populations, are becoming more important for Chinese companies, but Western economies still represent an opportunity for Chinese brands with competitive prices and cultural relevance.
It’s not a question of whether Chinese companies are coming; it’s whether you’re ready to match its speed, cost and efficiency.
5. Will Chinese AI reshape productivity, in China and beyond?
Before 2025, Silicon Valley appeared to have an insurmountable advantage over China in AI. Then came perhaps the biggest Chinese story of the year: DeepSeek’s open-source AI model, which shook up markets and intensified competition in AI in China, the US and around the world.
China is now a leader in AI, even amid strict U.S. export controls and a moribund venture capital sector.
Big tech companies like Alibaba have launched models that rival the best in the US, while a swarm of “little dragons” — smaller, nimble AI startups — have launched their own innovative models. Chinese AI now performs strongly in LLM (large language model) rankings.
China’s innovation engine—rapid iteration, cost-efficient scalability, strong engineering talent, and collaborative open-source development—explains how the country has managed to take the lead in AI.
But business impact is more important than technical performance. Will this AI capability translate into significant productivity gains?
An analysis by McKinsey Global Institute finds that Chinese companies rank in the top ten in 16 of 18 sectors that could drive up to a third of GDP growth by 2040, with AI playing an important enabling role in many of them.
More concrete signs could emerge next year as China continues to invest in AI use cases in its manufacturing sector. A new “DeepSeek moment”, perhaps in the industry, could be a safe bet for 2026.
Looking ahead
2026 begins with more acute risks for China: geopolitical uncertainty, a weakened real estate sector, pressured public finances and high youth unemployment. Still, what attracts companies to China—scale, innovation, and global influence—remains as compelling as ever.
The companies that will win in China next year will not be those with the best macroeconomic forecasts, but those capable of winning on the battlefield: building resilient supply chains, differentiating themselves from the competition and taking advantage of the country’s innovation.
For global companies prepared to operate with this level of discipline, China can still be a profitable market in the Year of the Horse.
2026 Fortune Media IP Limited
