SMEs in China account for over 60% of the GDP and 80% of urban employment, encounter a challenging environment in early 2025.

Although the post-pandemic recovery is ongoing, persistent structural and external pressures jeopardise their stability. Below, we examine the most significant challenges, backed by data and reliable sources.

1. Economic Slowdown and Weak Demand

China’s GDP growth is projected to stabilise at 4.5% in 2025, down from pre-pandemic highs, reflecting subdued domestic consumption and global trade friction.

SMEs in export-reliant sectors, such as manufacturing and textiles, grapple with reduced orders from key markets like the EU and the U.S., where tariffs and “de-risking” policies persist.

Domestic demand remains tepid, with consumer confidence still recovering from prolonged COVID-19 lock-downs.

2. Regulatory and Compliance Burdens

Beijing’s push for sustainability and data governance has intensified. Under China’s dual-carbon goals, SMEs must now comply with stricter environmental, social, and governance (ESG) reporting requirements.

Additionally, updated cyber-security laws (e.g., the Data Security Law) impose hefty fines for non-compliance, disproportionately burdening smaller firms lacking legal and technical resources.

3. Cash Flow and Financing Constraints

Access to credit remains a hurdle.

Despite government pledges to support SMEs, state-owned banks prioritise low-risk loans to large corporations. 

In 2024, only 28% of SMEs secured bank financing, down from 35% in 2022. Many resort to shadow banking, where interest rates exceed 15%, exacerbating debt risks.

Delayed client payments further strain liquidity. Some statistics indicate that roughly 67% of SMEs report overdue receivables.

4. Labour Costs and Talent Shortages

Wages in China’s manufacturing hubs have risen 8% annually since 2020, driven by labour shortages and an ageing workforce.

Skilled workers gravitate toward tech giants or overseas opportunities, leaving SMEs struggling to fill roles in automation and green tech.

The “Common Prosperity” policy has also increased mandatory benefits, raising operational costs.

5. Supply Chain Volatility

Geopolitical tensions and evolving global supply chains continue to disrupt business operations worldwide.

For instance, U.S. export restrictions on advanced semiconductors have forced many companies, particularly SMEs, to pivot to more expensive domestic or alternative suppliers.

At the same time, volatile commodity prices—such as lithium for electric vehicle batteries—are squeezing profit margins across industries. According to a 2024 report by the Ministry of Commerce, 41% of SMEs still lack robust contingency plans to mitigate supply chain disruptions, leaving them vulnerable to shocks.

While advancements in AI, such as DeepSeek, are transforming industries and enabling smarter decision-making, the reliance on advanced microchips remains critical.

Despite China’s significant investments in AI and semiconductor self-sufficiency, the development of cutting-edge chips still lags behind global leaders. This underscores the ongoing interdependence of technology, geopolitics, and supply chain resilience in an increasingly complex global economy.

Meanwhile, fluctuating commodity prices—such as lithium for EVs—squeeze profit margins.

The Ministry of Commerce reports that 41% of SMEs lack contingency plans for supply chain shocks, which is also something to bear in mind.

6. Technological Transition Pressures

Digitalisation and AI adoption are now existential for competitiveness, but 60% of SMEs cite high implementation costs as a barrier.

Cybersecurity vulnerabilities also loom large, with SMEs accounting for 70% of ransomware attacks in 2023.

What is the Path Forward?

To survive, SMEs are adopting hybrid strategies:

• • Partnering with tech platforms (e.g., Alibaba Cloud) for affordable AI tools.

• • Leveraging government subsidies for green upgrades.

• • Diversifying supply chains into ASEAN markets.

However, analysts warn that without systemic support—such as tax relief and streamlined regulations—many SMEs risk closure by 2026.

In a world where geopolitical tensions, supply chain disruptions, and rapid technological advancements are reshaping industries, staying ahead requires both insight and innovation. 

If you’re interested in diving deeper into these critical issues, explore our comprehensive report on IP Law to understand how intellectual property is shaping the future of global competition.

Additionally, our latest ebook on Business Forecasting and Technological Innovation which you can find in our Insights Hub offers actionable strategies to navigate uncertainty and harness the power of emerging technologies like AI.

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