In February 2026, German Chancellor Merz led a thirty-firm composed business delegation to Beijing, met Chinese leaders, and signed five intergovernmental agreements covering climate cooperation, agricultural trade and cultural exchanges. Similar visits by French President Macron and UK Prime Minister Starmer preceded it. These visits reflect a commercially grounded reality rather than a political novelty: the bilateral economic relationship is structurally too significant for either side to treat as expendable. Eurostat records that in 2024 China accounted for 21.3% of extra-EU imports and served as the EU’s third-largest export destination, with a total goods trade of 732 billion euros. China returned to its position as Germany’s most important trading partner in 2025, with bilateral flows of 251.8 billion euros.
In the China-EU bilateral trade and investment relationship, the SME dimension deserves to be analysed on its own terms. China-EU SME cooperation is no longer a broad story of market entry, cost arbitrage or one-directional technology transfer. It is becoming a more selective, capability-sensitive relationship shaped by sectoral complementarity, financing conditions and the management of regulatory uncertainty. The question worth asking is not whether cooperation has become more demanding, but whether its underlying economic rationale remains intact, and if so, in what form.
The Logic of European SMEs in China
Today, European SMEs operating in China are not, for the most part, pursuing mass-market expansion; many are present because they follow established customers, occupy narrow technical niches, or provide specialised services within larger cross-border production systems. The EU SME Centre’s 2025/2026 survey found that 44% of SME respondents derived more than half their China revenue from other European companies, while 51% of larger respondents derived theirs mainly from Chinese firms. This dependence on specialised B2B roles also helps explain why new SME entry has become more selective. The question is not simply whether incumbent European firms will increase investment, but whether firms without an existing China platform still find the market accessible enough for first-time entry. In the EU SME Centre’s 2025/2026 survey, 81% of respondents had operated in China for more than ten years, while only 2% had been present for less than one year, reflecting the growing concentration of European activity among established incumbents rather than new entrants. Rhodium Group similarly finds that recent European FDI into China has been driven by a small number of large incumbent firms and projects rather than broad-based new corporate entry.
The resulting pattern is not market closure, but a higher entry threshold. The principal obstacles SMEs report are cumulative transaction costs rather than formal exclusion: 37% cited late payments and cash-flow difficulties, 34% rising operational costs, and 38% difficulty obtaining credit from Chinese domestic banks. The SME Position Paper 2025/2026 reinforces this picture, placing emphasis on financing constraints, payment discipline and administrative predictability. For smaller firms, regulatory unpredictability is not a secondary inconvenience but often the factor that determines whether China remains commercially viable as a first market entry, rather than only as a market for firms already embedded through customers, partners or sectoral niches.
Adapting Strategies and Persistent Demand
Aggregate sentiment data can obscure firm-level commercial reality. The German Chamber of Commerce in China’s (AHK) Business Confidence Survey 2025/26, covering 627 member companies, found that 93% had no plans to exit China and 56% intended to deepen cooperation with Chinese partners. Such figures reflect considered positioning rather than path dependency. German firms in particular have accumulated decades of relationships, supply-chain presence and technical reputation in China — assets that are not easily redeployed in response to short-term policy signals. What has changed is not the commitment but its commercial logic. The earlier model, in which European firms entered China primarily to sell into a growing consumer market or access lower-cost manufacturing, no longer captures the dominant commercial logic. Firms with genuine technical depth are increasingly seeking embedded roles as service providers within Chinese industrial systems, local R&D contributors to product adaptation, or certification and compliance intermediaries for Chinese firms meeting international standards. German FDI into China increased 7.1% in the first seven months of 2025, consistent with this shift toward more deeply embedded operational presence.
The Sino-German Innovation Industry Park in Changzhou illustrates this model at scale: by May 2025 it had attracted 76 German-speaking enterprises, approximately 60% of them Hidden Champions or comparable specialists, with total investment exceeding 2.3 billion euros and over 30 German firms integrated into local new-energy supply chains. The park’s trajectory suggests that, where institutional infrastructure is adequately designed, European SME engagement with Chinese industrial ecosystems can be commercially sustained over the long term. The European Union Chamber of Commerce in China’s Business Confidence Survey 2025 found that 73% of respondents rated doing business in China as more difficult than the previous year, yet 38% still planned to expand. Firms with technically differentiated offerings continue to find viable positions, and the distinction between those that do and those that do not increasingly tracks competitive specificity rather than market size.
Market Competition and Capacity Learning
The Chinese firms that European SMEs encounter today differ materially from those of a decade ago. China had by late 2025 cultivated more than 17,600 national-level “Little Giant” firms, representing just 3.5% of above-scale industrial SMEs by number yet contributing 13.7% of sectoral profits, with average R&D intensities of 7%. The sectors in which these firms are concentrated, including automotive components, industrial automation, specialty materials and precision instruments, overlap substantially with those where European Hidden Champions have historically held strong positions. The practical implication is that the older cooperation script, predicated on European technology and Chinese scale with a clear capability asymmetry, no longer adequately describes commercial reality. The AHK’s Business Confidence Survey 2025/26 found that 60% of German firms in China expected Chinese companies to become innovation leaders in their respective industries, a striking assessment that points to the need for European SMEs to move continuously toward higher-value, less-replicable positions: deeper customisation, more complex systems integration, or joint development where the combination of European precision and Chinese scale or innovation speed generates value neither side could produce independently.
Competition in China has become a source of capability renewal for European firms, not only a market-share contest. The gains are real but specific, being less to access to Chinese core technology or proprietary intellectual property than to a form of applied learning that is harder to acquire elsewhere. For smaller firms, the more realistic gain is applied knowledge: faster product definition, cost-sensitive engineering, supply-chain coordination, digital customer interfaces and a sharper reading of Chinese competitors’ internationalisation strategies. This is visible in the German evidence. The AHK’s Business Confidence Survey 2025/26 reports that 33% of German companies in China already see knowledge and expertise flowing back from Chinese subsidiaries to headquarters, with innovative solutions the leading category of such reverse transfer. A leading case is Volkswagen’s newly opened Hefei R&D and Testing Centre: the first facility outside the company’s Wolfsburg headquarters with full end-to-end vehicle development and validation capacity, it has delivered a near 30% reduction in the automaker’s vehicle development cycles. The AHK’s Innovation Report similarly shows why China functions as a learning environment: 29% of surveyed German companies conduct R&D in China for global markets, 56% identify time-to-market as their weakest point compared with local competitors, and price-sensitive customers and stronger local competitors are major drivers of innovation. For European SMEs, the strategic value of China is therefore shifting from sales expansion alone to a combination of market access and competitive learning.
Compliance Costs and Policy Conditions
Some EU regulations, such as the Foreign Subsidies Regulation, which has been in force since July 2023, impose fixed informational and procedural burdens. For larger Chinese firms, absorbing these requirements is costly but manageable. For Chinese SMEs, the same compliance burden can alter the commercial calculus of cross-border participation more fundamentally. A survey of 205 Chinese enterprises in the EU found that 63% reported operational impacts, with aggregate losses estimated at approximately 15.6 billion renminbi (or 2 billion euros). As regulatory complexity accumulates across export-control obligations and data-compliance rules, internationally active SMEs tend to feel the burden disproportionately. The European Union Chamber of Commerce in China’s finding that 63% of European firms missed business opportunities due to implementation inconsistencies points to an analogous challenge on the Chinese side: a gap between formal policy commitments and local administrative practice that raises transaction costs for smaller firms with limited capacity to absorb them. These are bilateral coordination problems, not asymmetric impositions, and they are correctable without requiring either side to alter its broader strategic posture.
China’s formal liberalisation steps deserve acknowledgement in this context. The 2024 revision of the negative list removed all remaining manufacturing-sector market-access restrictions for foreign investors, and the 2025 Action Plan for Stabilising Foreign Investment committed to further improvements in financing access and government procurement standards. For European SMEs, the central remaining challenge is consistent local implementation of these commitments. For European policymakers, the parallel design question is whether instruments such as the Foreign Subsidies Regulation can be calibrated with differentiated compliance pathways that preserve their substantive purpose while reducing the disproportionate burden on smaller market participants. At the operational level, improvements in cross-border credit access, payment discipline and regulatory predictability would generate efficiency gains for smaller firms on both sides that significantly exceed their administrative cost.
Conclusion
The realistic near-term trajectory for China-EU SME cooperation is neither a return to earlier optimism nor comprehensive economic disengagement in sectors where complementarities remain real. What is emerging is a more conditional form of commercial interdependence: more compliance-intensive and less forgiving of weak market positioning, but economically meaningful where firm-level complementarity is genuine, transaction costs are brought to a manageable level, and a minimum degree of operational predictability is maintained. The low share of very recent SME entrants suggests that China is no longer a broadly accessible first-entry market for European SMEs; it is a market that rewards clear technical differentiation, patient partner strategies and the capacity to learn from demanding competition. European SMEs, and German Hidden Champions in particular, have demonstrated a capacity for strategic adaptation that aggregate sentiment data tends to obscure. The 60% of German firms that expect Chinese companies to become innovation leaders are not signalling retreat; many are positioning to work alongside those leaders in areas where the combination of respective capabilities creates durable value. Sustainability, rather than scale, is increasingly the more useful criterion for evaluating the quality of the China-EU SME relationship as it continues to adapt.
Author: Dr. TANG Yuxuan, Research Associate, Shanghai University of International Business and Economics; Prof. ZHANG Chao, EIAS Visiting Research Fellow & Associate Professor, Acting Deputy Director of Department of International Relations Institute of European Studies, Chinese Academy of Social Sciences
Photo credits: Jason Hu