2025 was a turbulent year for China. The country began the year battling geopolitical headwinds and weak domestic demand. By 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 passed $1 trillion, a record high. GDP growth remained steady at around 5%. The country seems to have shrugged off concerns of “deglobalization.”
What does 2026, the Year of the Horse, pose for China? The headlines may focus on Trump tariffs or real estate woes, but there are more subtle trends happening that will define China’s economic trajectory. China presents new challenges for international business, particularly from confident local competitors, but there are still opportunities for disciplined global executives. Five key questions will matter as the world’s second-largest economy navigates a fast-changing global economy.
How will tariff uncertainty shape your China strategy?
China has long dominated global manufacturing, thanks to its cost competitiveness and integrated supply chains. That strength remains intact despite higher U.S. tariffs in 2025, which have now stabilized at around 50%. The tariffs barely dented China’s trade: The country’s share of global goods exports held steady at around 14%, four times greater than India and Vietnam combined.
The reason is that China has already broadened its trade partners. Goods exports to the U.S. represent just 2-3% of China’s GDP, and over half of China’s goods exports now go to Global South economies including ASEAN, Latin America, the Middle East, and Africa.
China also exports more knowledge-intensive goods, such as electronics and automobiles, and fewer labor-intensive goods, like furniture and toys.
Beijing’s bought itself some time, but 2026 will be the test of how resilient China’s export economy truly is. Trade patterns will continue to shift, with one analysis by the McKinsey Global Institute suggesting that as much as 30% of global trade could be shift corridors by 2035. The trade map is being redrawn in real time.
Multinational companies with a presence in China need supply chain flexibility, so that can rewire their operations as quickly as China’s companies can.
Where are Chinese consumers spending, and what does that mean for global brands?
Before the pandemic, Chinese consumers drove near-double-digit retail growth each year. Yet in 2025, consumer confidence hit historic lows, youth unemployment hovered around 15%, and real estate remained stagnant. Yet retail spending grew around 4-5% in the first three quarters of 2025 year-on-year.
Chinese consumers continue to spend—just on different things. Tourism spending rose 12% in the first three quarters of 2025, while box office revenue jumped 22%. Government subsidies supported double-digit growth in spending on electric vehicles and home appliances. Discretionary spending, however, struggled.
The opportunity for executives lies in tapping China’s sizable household savings. Consumers are waiting for something worth buying, and so the challenge will be to offer products and services that Chinese shoppers think are genuinely worth pursuing. Competing on price alone won’t work; only a compelling value proposition will unlock these locked savings.
Can your business survive and thrive in China’s hyper-competitive market?
China is struggling with deflationary pressure, even as the West fights inflation. 2025 accelerated what the Chinese call “involution”, an intense competition that erodes margins across the industry. Roughly 30% of large industrial firms reported losses, up from 20% before the pandemic.
But the period of “overcapacity” may be easing. Fixed asset investment slowed, and then shrank, reflecting weaker spending in some sectors. Rather than being a concern, lower investment may signal that companies are pulling back from excessive expansion, correcting years of overinvestment that flooded markets and destroyed pricing power. That adjustment, if reinforced by appropriate reforms, could eventually stabilize margins.
Companies must now differentiate through technology, branding and services, and not just price. Importantly, success in China will lead to a competitive advantage anywhere else in the world. Otherwise, competition with Chinese players can be brutally unforgiving—not just on their home turf, but increasingly overseas as well.
Are you ready to face Chinese competitors abroad?
China has attracted foreign capital for decades. But last year, China turned into growing source of investment. Foreign direct investment announcements into China between 2022 and 2025 fell by roughly two thirds, compared to between 2015 and 2019 on an annualized basis. Outbound Chinese FDI announcements held steady at around $100 billion annually, but it’s broadened beyond the traditional destination of emerging Asia to newer markets like Latin America, the Middle East and Europe.
Chinese companies are also becoming global cultural exporters. Pop Mart’s Labubu figurines, the blockbuster Black Myth: Wukong, and Chinese EV brands have all 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 your home turf. Global South markets, and their younger and increasingly affluent populations, are becoming more important to Chinese companies, but Western economies still present an opportunity for Chinese brands that are competitively priced and culturally relevant. It’s not a question of whether Chinese companies are coming; it’s whether you’re ready to match their speed, cost, and efficiency.
Will Chinese AI reshape productivity, in China and beyond?
Before 2025, Silicon Valley looked like it had an insurmountable lead over China in AI. Then came perhaps the biggest China story of the year: DeepSeek’s open-source AI model that rocked markets and intensified AI competition in China, the U.S., and around the world.
China is now an AI leader, even amid tough U.S. export controls and a moribund venture capital sector. Major tech firms like Alibaba rolled out models competing with the best from the U.S., while a swarm of “little dragons”—smaller, agile AI startups—released their own innovative models. Chinese AI now perform strongly on LLM leaderboards
China’s innovation engine—rapid iteration, cost-efficient scaling, substantial engineering talent, and collaborative open-source development—explains how the country was able to take the lead on AI.
But business impact is more important than technical performance. Will this AI capability translate into meaningful productivity gains?
McKinsey Global Institute analysis finds Chinese companies rank in the top ten in 16 of 18 sectors that can drive up to one-third of GDP growth by 2040, with AI playing an important enabling role across many of them.
More meaningful signals may emerge next year, as China continues to invest in AI use-cases across its manufacturing sector. A new “DeepSeek moment,” perhaps in industry, might be a sure bet for 2026.
Looking ahead
2026 begins with sharper risks for China: Geopolitical uncertainty, a struggling real estate sector, strained public finances, and elevated youth unemployment. Yet what draws companies to China—scale, innovation, and global influence— remain as compelling as ever.
The companies that will win in China next year won’t be those with the best macroeconomic forecasts, but rather those that can win on the ground: building resilient supply chains, differentiating themselves from the competition, and harnessing the country’s innovation.
For global businesses prepared to operate with this level of discipline, China can still be a lucrative market in the Year of the Horse.
