This article aims to analyse the significant challenges facing Chinese enterprises in the coming two decades. To sustain and enhance its export growth, China must actively explore foreign markets, as relying solely on domestic demand is becoming increasingly insufficient. Despite advancements in industrial innovation, China's declining population limits the potential for improved income from domestic markets. Furthermore, while companies like BYD and Huawei exemplify successful innovation, many Chinese firms struggle to keep pace. This article identifies promising global markets for these enterprises and discusses the geopolitical, ESG, and climate risk considerations that will shape their international operations.
Stagnating Growth of Exports?
China has been a global manufacturing hub for many years. However, from 2012 to 2019, export growth stagnated due to weak demand from developed economies (see the shaded box in Graph 1). The aftermath of the 2008 financial crisis left many advanced economies struggling, with some European nations on the brink of collapse. Additionally, trade tensions between the USA and China during this period redirected the USA imports from China to other countries.
During the COVID-19 pandemic, China's exports experienced a rebound, as it was one of the few countries sustaining normal production levels. However, from 2022 to 2024, this growth stagnated despite notable advancements in industrial and product innovation, particularly in telecommunications equipment, electric vehicles, smartphones, solar technologies, semiconductors, drones, artificial intelligence, batteries, and video games. During this period, the reduction of reliance on China by the United States and Europe significantly contributed to the sluggish growth of Chinese exports.
Another Round of Massive Government Spending?
From 2009 to 2020, China's total GDP kept growing steadily but the percentage of China's exports relative to its GDP consistently declined. This trend indicates that much of the country's economic growth came from other sectors, such as government spending on infrastructure and real estate. China has developed an impressive transportation network, including subways, intercity high-speed rail, and modern airports. However, this rapid development raises questions about whether similar massive government spending will happen again in the next two decades.
Declining Population
One of the most pressing challenges for Chinese enterprises is the decline in population. China's population peaked in 2021, followed by decreases in 2022 and 2023. The IMF predicts this trend will continue over the next five years, driven by an aging demographic and the long-term effects of the one-child policy.
What will happen in the next 10 years? If government spending increases modestly and population growth continues to fall, businesses will face intense competition in the domestic market. To thrive, companies must offer exceptional products and innovative services. Firms selling traditional goods will face increasing pressure as consumer preferences shift and demand drops. Obviously not all companies are well prepared for innovation.
Ordinary enterprises must seek new markets outside China to remain viable. The question becomes: where should they go? Finding suitable international markets will be crucial for survival. Without exploring these options, many businesses risk being sidelined in an increasingly competitive landscape.
The Top Economies in GDP and in Population by 2050
A simple way to identify promising markets for Chinese exports is to focus on the largest economies by GDP and population. Countries with high GDP and large populations generally have strong consumption. Table 1 lists the top economies projected for 2050 in both categories, with India, the USA, Indonesia, and Brazil appearing on both lists, indicating good potential for Chinese exports. Unfortunately, the USA-China trade tension should remain for a long period.
The table also highlights three African countries, including Nigeria, Ethiopia, and the Democratic Republic of the Congo, whose combined population is approximately 802 million in 2050. In addition to the two giant Asian countries, India and China, three other Asian countries, including Pakistan, Indonesia, and Bangladesh, are expected to have a combined population of 908 million by 2050. If these emerging economies in Africa and Asia continue to grow steadily, they could become significant markets for Chinese exports.
Moreover, the above emerging economies typically have a higher percentage of young people (aged 40 and below), indicating long-lasting consumer demand over the next 20-30 years. They also offer a workforce with young talent and lower labour costs for Chinese firms looking to establish operations in the region.
▪ Other Risk Factors in Global Expansion
Geopolitical Considerations
As Chinese enterprises expand globally, they must navigate geopolitical issues that can impact their supply chains, operations, and reputations. Geopolitical tensions, trade disputes, and shifting international alliances create uncertainties affecting market access and regulatory environments. For example, companies may face trade tariffs, entry bans, or additional taxes due to diplomatic conflicts or environmental regulations. Advanced economies and their close alliances are likely to present challenges for Chinese firms seeking to export their goods.
ESG Issue
In addition to geopolitical factors, Chinese enterprises must address ESG standards in their global strategies. Stakeholders, including consumers, investors, and regulators, increasingly demand responsible practices in environmental sustainability, social equity, and corporate governance. Advanced economies are likely to impose stricter ESG requirements, while some emerging economies have also raised their standards. Certain countries intentionally set high ESG standards as import barriers.
Carbon Tax and Green Energy
The EU's Carbon Border Adjustment Mechanism (CBAM), set to take effect in 2026, will significantly impact Chinese exports, particularly in carbon-intensive industries. This mechanism will impose a carbon tax on imports of specific goods, such as steel, aluminum, cement, and fertilisers, to equalise carbon costs between EU and non-EU producers. Its aim is to prevent "carbon leakage," where companies relocate production to countries with less stringent environmental regulations, thus undermining the EU's climate goals. Consequently, Chinese exporters may face substantial costs related to carbon emissions or the need for improvements to mitigate them.
Chinese enterprises can consider relocating carbon-intensive operations to countries with abundant green energy. For example, Laos generates over 80% of its energy from renewable sources and exports green energy to neighbouring nations. Similarly, Brazil also produces 80% of its energy from green sources. This relocation offers several advantages. First, products from these overseas operations can maintain a competitive edge, even when carbon emissions are taken into account. Second, moving operations abroad directly reduces energy demand in China, helping the country progress toward its goal of carbon neutrality. Finally, this shift can support industrial development in emerging economies, fostering growth in those regions.
Climate Risk
Climate change poses risks to all populations, but certain regions are more vulnerable. Coastal cities, where many businesses operate, face increasing threats from flooding and extreme weather, leading to infrastructure damage, operational disruptions, and higher insurance costs. Climate change can exacerbate water scarcity, affecting industries that rely on water for production. Rising temperatures and shifting rainfall patterns threaten agricultural productivity, potentially disrupting food supply chains.
In Asia, cities like Kolkata, Jakarta, Bangkok, Ho Chi Minh City, Manila, Shanghai, Taipei, and Tokyo are projected to be at risk of submersion by 2050. Chinese enterprises should consider these long-term climate risks when choosing locations for global expansion.
Summary and Conclusions
This article identifies critical challenges facing Chinese enterprises, including a declining population and increasing domestic competition. As the population ages and consumer preferences evolve, companies must adapt their strategies to remain competitive.
To succeed, Chinese firms must prioritise international expansion, particularly in emerging economies in Africa and Asia. These regions present significant opportunities due to their growing consumer bases and lower labour costs. Additionally, enterprises must navigate geopolitical tensions and comply with country-specific ESG standards. Meeting these requirements is essential for gaining market access and maintaining a strong global reputation.
Climate change poses additional risks that require careful consideration in global expansion. Chinese enterprises should strategically select expansion locations to minimise environmental exposure and vulnerabilities.
In summary, immediate action is essential. By targeting emerging markets and addressing these pressing challenges, Chinese enterprises can enhance their prospects for success over the next two decades.
