What questions should international leaders consider regarding China in 2026

China's Economic Landscape in 2025 and the Road Ahead

The year 2025 proved to be a challenging period for China, marked by international tensions and sluggish domestic consumption. Early in the year, the introduction of new tariffs and escalating trade disputes led to some of the most consequential trade measures in recent memory.

However, by the end of the year, the narrative had shifted dramatically. China's trade surplus soared past $1 trillion for the first time, and the nation's GDP maintained a steady growth rate of approximately 5%. Despite widespread fears of a retreat from globalization, China appeared to weather the storm.

As 2026—the Year of the Horse—approaches, the focus turns to what lies ahead for China. While headlines may highlight issues such as U.S. tariffs or the ongoing real estate slump, deeper, less visible trends are shaping the country's economic direction. International businesses face new hurdles, especially from increasingly capable local rivals, but there remain significant prospects for global leaders who act with discipline. Five pivotal questions will influence how the world’s second-largest economy adapts to a rapidly evolving global environment.

Adapting to Tariff Volatility: What’s Your China Playbook?

China’s dominance in global manufacturing is rooted in its cost advantages and tightly integrated supply chains. Even with U.S. tariffs stabilizing at around 50% in 2025, China’s export performance remained robust. Its share of worldwide goods exports held firm at about 14%—a figure that dwarfs the combined total of India and Vietnam.

This resilience is partly due to China’s diversified trade relationships. Exports to the U.S. now account for just 2-3% of China’s GDP, while over half of its goods are shipped to emerging markets in ASEAN, Latin America, the Middle East, and Africa.

China’s export portfolio has also shifted, with a greater emphasis on technology-driven products like electronics and vehicles, and a reduced focus on labor-intensive items such as furniture and toys.

While these strategies have bought China some breathing room, 2026 will reveal the true strength of its export sector. Trade flows are evolving rapidly; according to McKinsey Global Institute, up to 30% of global trade could shift to new routes by 2035. The global trade landscape is being redrawn in real time.

For multinational firms operating in China, agility in supply chain management is essential to keep pace with these changes.

Shifting Consumer Patterns: What’s Next for Global Brands?

Chinese consumers were once the engine of rapid retail expansion, with near double-digit growth before the pandemic. Yet in 2025, consumer sentiment reached record lows, youth unemployment hovered near 15%, and the property market remained sluggish. Nevertheless, retail sales still managed to grow by about 4-5% year-over-year in the first nine months of 2025.

Chinese consumers are still spending, but their priorities have shifted. Tourism expenditures climbed by 12% and box office receipts surged by 22% during the same period. Government incentives fueled robust demand for electric vehicles and home appliances, though discretionary purchases lagged behind.

For business leaders, the key lies in unlocking China’s vast household savings. Shoppers are waiting for products and services that truly stand out. Competing solely on price is no longer enough—brands must offer genuine value to persuade consumers to open their wallets.

Thriving Amid Fierce Competition: Can Your Business Stand Out?

While Western economies grapple with inflation, China faces the opposite problem: deflation. The intense competition—often referred to as “involution”—has squeezed profit margins across industries. In 2025, nearly 30% of large manufacturers reported losses, up from 20% before the pandemic.

However, the era of excessive capacity may be coming to an end. Investment in fixed assets slowed and even contracted in some sectors, suggesting companies are pulling back from overexpansion. This recalibration, if supported by effective reforms, could help stabilize profitability in the long run.

Success in China now depends on innovation in technology, branding, and services—not just price. Companies that can distinguish themselves in this environment will gain a competitive edge not only in China, but globally. The competition from Chinese firms is relentless, both domestically and increasingly abroad.

Meeting Chinese Rivals on the Global Stage

For years, China was a magnet for foreign investment. Recently, however, it has become a major source of outbound investment. Between 2022 and 2025, foreign direct investment announcements into China dropped by about two-thirds compared to the previous decade, while Chinese outbound FDI remained steady at around $100 billion annually, expanding into new regions such as Latin America, the Middle East, and Europe.

Chinese companies are also making their mark as cultural exporters. Products like Pop Mart’s Labubu toys, the hit video game Black Myth: Wukong, and Chinese electric vehicle brands are gaining international popularity. This signals a growing influence of Chinese culture and consumer trends worldwide.

In 2026, expect Chinese competitors to become even more prominent in international markets. While emerging economies are a key focus, Western markets still offer opportunities for Chinese brands that combine affordability with cultural relevance. The question is not if Chinese firms will enter your market, but whether you are prepared to match their speed, efficiency, and cost structure.

The Rise of Chinese AI: Transforming Productivity at Home and Abroad

Until recently, Silicon Valley appeared to have an unassailable lead in artificial intelligence. That changed in 2025, when DeepSeek’s open-source AI model shook up the industry and intensified global competition.

Despite strict U.S. export controls and a sluggish venture capital environment, China has emerged as a powerhouse in AI. Leading tech giants like Alibaba have launched models that rival the best from the U.S., while a wave of nimble startups—dubbed “little dragons”—have introduced their own breakthroughs. Chinese AI models now rank highly on global leaderboards.

China’s rapid progress in AI is driven by fast iteration, cost-effective scaling, a deep pool of engineering talent, and a collaborative open-source culture.

Yet, the real test is whether these technological advances will translate into tangible productivity improvements. According to McKinsey Global Institute, Chinese firms are among the top ten in 16 out of 18 sectors poised to drive up to a third of global GDP growth by 2040, with AI playing a crucial role in many industries.

As China continues to invest in AI applications across manufacturing and other sectors, the coming year may bring another transformative moment akin to DeepSeek’s breakthrough.

What Lies Ahead for China?

China enters 2026 facing heightened risks: ongoing geopolitical tensions, a troubled property market, fiscal pressures, and persistent youth unemployment. Nevertheless, the country’s scale, innovative capacity, and international reach remain powerful draws for businesses.

The companies that will succeed in China in the coming year are not those with the most optimistic forecasts, but those that excel in execution—building robust supply chains, differentiating themselves, and leveraging China’s innovative ecosystem.

For global firms willing to operate with discipline and adaptability, China continues to offer significant opportunities in the Year of the Horse.