Risks and opportunities for European businesses
China’s consumer market is currently at a turning point. Economic uncertainty continues to weigh on confidence, but the sector remains supported by policy focus, the emergence of new growth areas, consumer‑led innovation and rapid digital adoption. Future growth is likely to be uneven, with opportunities emerging in specific segments rather than across the market. In this article, Nanda Lau and Alizee Zheng explain what this means for European businesses.
European businesses in China face an uncertain year. Opportunities remain, but success now depends on sharper focus and deeper localisation, supported by disciplined execution. The year ahead will be shaped by shifting consumer behaviour, alongside selective investment activity and a more demanding compliance environment.
Part I: Key consumer trends shaping 2026
1) Policy support continues to favour consumption‑led growth
China has made boosting household consumption a clear priority. The 15th Five‑year Plan calls for a significant rise in the household consumption rate, backed by measures introduced since 2025 to lift confidence and spending. These include government subsidies for trade-in programmes that encourage consumers to replace old appliances and products with newer and more energy‑efficient ones.
For European consumer businesses in China, policy support favours services, quality products and sustainability, but comes with higher expectations for product standards and compliance.
2) Consumer behaviour reflects both caution and aspiration
Chinese consumers remain cautious about spending, placing a greater focus on price and value. Yet this caution has not removed demand for experiences. Younger consumers continue to spend on wellness and products with emotional appeal, such as collectable toys or immersive pop‑up events.
Health and wellness remains a long‑term trend, with steady demand for fitness and preventative care. For consumer brands, this underlines the need to balance affordability with differentiation and experience-led positioning.
3) Technology is becoming a key driver of competition
Digitalisation across retail and services continues to accelerate. Artificial intelligence (AI)‑enabled tools are now part of everyday product development and marketing, and are increasingly shaping how companies engage with customers. What matters most is not the technology itself, but how rapidly it is becoming embedded in core business functions and operational processes.
For European companies, this makes localisation essential, from digital strategy and platform integration to early attention to data and AI compliance.
Recent policy signals reinforce this direction. The latest Government Work Report highlights faster AI commercialisation and growth in the digital sector. For consumer businesses, this supports technology‑driven, experience‑led consumption while raising expectations for compliance and responsible AI use.
4) Travel and experience‑based consumption are regaining momentum
China’s tourism sector continues to recover, supported by improving mobility and more flexible entry policies. Domestic, inbound and outbound travel are all contributing to growth across hospitality and travel retail.
This recovery reinforces the shift toward experience‑based consumption and creates renewed opportunities for European brands with premium and experiential offerings.
Part II: Investment and mergers and acquisitions (M&As)
China’s consumer sector entered a period of adjustment in 2025. While liquidity remained constrained and investor sentiment was cautious in some areas, the sector continued to offer selective opportunities, particularly in segments aligned with long‑term consumption trends.
1) Policy support and financing flexibility
Recent policy measures point to a more supportive environment for inbound investment and deal‑making. Steps to facilitate foreign participation in M&As, including streamlined approval processes and greater flexibility for cross‑border share swaps, are expected to lower execution barriers for overseas investors (including under the Action Plan for Stabilising Foreign Investment, released in February 2025[1]).
Policy direction also continues to favour service‑led consumption, with encouragement for foreign investment in areas such as healthcare, elderly care, culture, tourism and education. These segments are likely to attract increasing attention from strategic and financial investors in 2026.
Financing conditions have also improved. Regulatory changes have expanded the availability and terms of M&A loans—including for transactions involving control and minority equity participation—under the Administrative Measures for M&A Loans by Commercial Banks, effective 31st December 2025.[2] Together, these developments help ease funding constraints and support restructuring and consolidation in the consumer sector.
2) Portfolio reshaping and private equity activity
Market conditions are driving a reassessment of corporate portfolios. Both domestic and multinational companies are reviewing their China operations, with increased focus on core brands and growth platforms. This has resulted in a number of high‑profile carve‑outs and divestments of non‑core or underperforming assets.
These transactions highlight the growing role of private equity as active owners of established consumer brands, focussed on unlocking brand value following acquisition.
At the same time, joint ventures remain a common structure for international brands seeking market access, local insight and risk sharing in a more complex operating environment.
3) Outbound investment gains momentum
Competitive pressure at home continues to drive Chinese consumer brands to expand overseas. This trend spans multiple sectors, including food and beverage, e‑commerce and lifestyle brands. The global expansion of Chinese collectable toy intellectual property (IP) is one example of how domestic brands are gaining traction with international consumers and reshaping traditionally global categories.
Outbound strategies increasingly extend beyond product exports. Many companies are building integrated overseas operations to diversify supply chains and gain direct access to high‑growth consumer markets, particularly in Southeast Asia. As these businesses scale globally, they are becoming more influential competitors for established multinational players.
4) Capital markets remain active
Hong Kong continues to serve as a key offshore listing venue for Chinese consumer companies. The retail and consumer sector remained one of the more active initial public offering segments in 2025, with proceeds commonly used to fund overseas expansion and broader international brand development.
This capital‑raising activity aligns with broader outbound investment trends and is expected to remain an important funding channel for Chinese consumer businesses with global ambitions.
5) Looking ahead
Dealmaking activity in China’s consumer sector is likely to pick up in 2026 as policy support, improved financing conditions and portfolio restructuring converge. Opportunities are expected to centre on strategic acquisitions, carve‑outs and partnerships that unlock brand value and operational synergies.
Companies that combine disciplined investment strategies with clear long‑term brand positioning will be best placed to benefit from the next phase of growth.
Part III: Key regulatory and compliance risks to watch in 2026
Regulatory expectations in China’s consumer sector continue to rise. Enforcement is becoming more demanding and less forgiving, increasing the importance of governance, preparation and early risk management for European businesses operating in China in 2026.
1) Higher standards, more targeted enforcement
Regulatory enforcement in the consumer sector is becoming more focussed and systematic. Authorities are placing sustained focus on product safety and service quality, alongside fair market conduct, particularly in areas linked to everyday consumption.
This direction is reflected in nationwide enforcement initiatives and closer supervision of higher‑risk products and services, such as the ‘Iron Fist Campaign’ in a number of cities.[3] Enforcement practice is also evolving. Regulators are increasingly combining penalties with guidance and corrective measures, including greater use of warnings and leniency for minor or first‑time breaches.
For European consumer businesses, baseline compliance standards are rising, but proactive engagement and strong internal controls, supported by early remediation, can still make a meaningful difference to regulatory outcomes.
2) Geopolitics meets compliance
Geopolitical tensions are increasingly intersecting with regulatory enforcement in ways that have direct operational consequences for foreign businesses. China’s sanctions and export control framework makes clear that geopolitical exposure can translate into contractual and compliance risk within the domestic market, including under China’s Anti‑foreign Sanctions Law[4] and the Unreliable Entity List regime.[5]
For European businesses, a China‑specific approach to geopolitical risk is increasingly essential. Contracts and supply chains need closer attention, alongside robust internal governance. In sensitive areas, increased scrutiny of data security and consumer protection is also likely, making geopolitical risk management part of day‑to‑day compliance and operational decision‑making in 2026.
3) Competition rules tighten
China’s competition framework is placing greater emphasis on fair and orderly competition, reflecting recent legislative and judicial developments. The revised Anti‑unfair Competition Law (effective 15th October 2025) strengthens safeguards against abuse of advantageous positions by large enterprises, tightens oversight of platform conduct, and explicitly addresses practices such as data scraping, unauthorised data use, fake orders, fake reviews and malicious returns.[6]
Judicial practice is also developing alongside these changes, while the regulatory framework is becoming more clearly defined. Recent updates provide clearer guidance on acceptable conduct, including the introduction of defined safe‑harbour thresholds for certain vertical agreements under the Revised Provisions on the Prohibition of Monopoly Agreements.[7]
For European consumer businesses, distribution models and platform relationships are therefore likely to face closer examination, particularly where vertical non-price restraints are involved. Practices previously tolerated, such as territorial restrictions, may now warrant reassessment as antitrust supervision becomes more proactive and preventive.
4) Stronger IP protection, higher expectations
China continues to strengthen its IP framework, reinforcing IP protection as part of its shift toward innovation‑driven growth. Policy direction and judicial practice increasingly point to a more predictable and enforceable IP environment, particularly for brand‑led and technology‑enabled consumer businesses.
This direction is reflected in recent policy initiatives and regulatory updates, including the 2025 Promotion Plan for Intellectual Property Powerhouse Construction[8] and the updated Patent Examination Guidelines,effective 1st January 2026.[9] These measures strengthen trademark and trade‑secret protection while offering clearer treatment of innovations linked to digital and data‑driven business models.
For European consumer businesses, the environment supports continued investment in brand value and innovation. At the same time, expectations are rising around proactive IP strategy, from early registration and trade‑secret management to closer alignment between innovation pipelines and China‑specific protection mechanisms. IP risk management is increasingly a strategic enabler, rather than a defensive afterthought.
5) Data and AI under closer scrutiny
Regulation of data and AI is tightening rapidly. Compliance thresholds are rising across the full lifecycle of data collection, use and transfer, turning what was once an information technology issue into a core governance and reputational risk for consumer‑facing businesses.
This shift is reflected in a series of regulatory updates covering personal information, biometric data, cybersecurity incident reporting and cross‑border data flows.
AI governance is also accelerating. New guidance sets clearer expectations for labelling and risk management of AI‑generated content, supported by active enforcement against non‑compliant applications.
For European businesses, data governance and AI compliance can no longer be treated as peripheral. Transparent data practices and strong internal controls, aligned early with digital strategy and regulatory requirements, will be critical to managing risk and maintaining consumer trust in 2026.
6) Employment flexibility narrows
China’s employment regulatory framework continues to evolve, with recent regulatory and judicial developments providing greater clarification on the application of employment arrangements.
Guidelines issued by the Ministry of Human Resources and Social Security in September 2025 specify that non‑compete agreements should generally apply only to senior management and technical personnel with access to trade secrets, with defined requirements on geographical scope and minimum compensation standards.[10] In the same period, guiding cases released by the Supreme People’s Court have clarified how courts determine employment relationships between platform companies and workers. In addition, the Interpretation on the Application of Law in the Trial of Labour Dispute Cases (II), effective from September 2025, strengthens employee protections and ensures nationwide consistency in labour dispute rulings.[11]
For European employers, these developments highlight the importance of reviewing employment documentation and management practices in light of evolving judicial standards.
As China’s consumer sector moves into 2026, regulatory and policy developments will continue to shape an evolving market. Businesses operating in the sector will need to follow developments closely, understand their compliance exposure and respond through targeted commercial and investment decisions.
Early preparation, supported by strong governance and disciplined execution will be critical. In a market that remains attractive but increasingly complex, the ability to manage risk while staying aligned with policy and consumer trends will help build competitive advantage.
Nanda Lau is head of M&A, China, and chief representative of Herbert Smith Freehills Kramer’s Shanghai Office.
Alizee Zheng is a senior associate at the firm.
Herbert Smith Freehills Kramer is a world-leading global law firm with 26 offices
worldwide. The firm advises international companies on complex corporate, regulatory
and dispute matters and supports clients in navigating legal and commercial
issues arising from doing business in China.
[1] 2025 Action Plan for Stabilising Foreign Investment, State Council, 22nd February 2025, viewed 29th March 2026, <https://english.www.gov.cn/news/202502/22/content_WS67b9044dc6d0868f4e8efdff.html>
[2] Administrative Measures for M&A Loans by Commercial Banks, National Financial Regulatory Administration,31st December 2025, viewed 29th March 2026,<https://www.gov.cn/zhengce/zhengceku/202601/content_7053613.htm>
[3] 2026 Qinghai Province Typical Cases of the “Iron Fist” Action in the Investigation and Handling of Cases in the Field of People’s Livelihood, Sina, 17th March 2026, viewed 3rd April 2026, <https://finance.sina.com.cn/jjxw/2026-03-17/doc-inhrhpmw3949957.shtml>
[4] Anti‑foreign Sanctions Law, Standing Committee of the National People’s Congress, 10th June 2021, viewed 3rd April 2026, <https://flk.npc.gov.cn/detail?id=ff80818179f5dd9f0179f89e7a1d05d3&fileId=&type=&title=%E4%B8%AD%E5%8D%8E%E4%BA%BA%E6%B0%91%E5%85%B1%E5%92%8C%E5%9B%BD%E5%8F%8D%E5%A4%96%E5%9B%BD%E5%88%B6%E8%A3%81%E6%B3%95>
[5] Provision on the Unreliable Entity List, Ministry of Commerce, 19th September 2020, viewed 3rd April 2026,<http://english.mofcom.gov.cn/Policies/AnnouncementsOrders/art/2020/art_26e3c471536d443c944d60c91bacaf9a.html>
[6] Anti‑unfair Competition Law, Standing Committee of the National People’s Congress, 15th October 2025, viewed 3rd April 2026, <https://flk.npc.gov.cn/detail?id=ff808181971552b40197b1016efc5437&fileId=&type=&title=%E4%B8%AD%E5%8D%8E%E4%BA%BA%E6%B0%91%E5%85%B1%E5%92%8C%E5%9B%BD%E5%8F%8D%E4%B8%8D%E6%AD%A3%E5%BD%93%E7%AB%9E%E4%BA%89%E6%B3%95>
[7] Revised Provisions on the Prohibition of Monopoly Agreements, State Administration for Market Regulation, 1st February 2026, viewed 3rd April 2026,<https://www.samr.gov.cn/zw/zfxxgk/fdzdgknr/fgs/art/2025/art_1145a4952f114948a68980fda8c0bdef.html>
[8] 2025 Promotion Plan for Intellectual Property Powerhouse Construction, State Council, 7th May 2025, viewed 29th March 2026,<https://english.www.gov.cn/news/202505/08/content_WS681ca582c6d0868f4e8f2594.html>
[9] Patent Examination Guidelines, National Intellectual Property Administration, 13th November 2025, viewed 29th March 2026,<https://www.cnipa.gov.cn/art/2025/11/13/art_74_202560.html>
[10] Compliance Guidelines on the Implementation of Non-compete Clauses by Enterprises, General Office of the Ministry of Human Resources and Social Security, 4th September 2025, 3rd April 2026,<https://www.gov.cn/zhengce/zhengceku/202509/content_7040571.htm>
[11] Interpretation on the Application of Law in the Trial of Labour Dispute Cases (II), Supreme People’s Court, 31ˢᵗ July 2025, viewed 29th March 2026, <https://supremepeoplescourtmonitor.com/wp-content/uploads/2025/08/interpretation-ii-of-the-supreme-people-s-court-of-issues-concerning-the-application-of-law-in-the-trial-of-labor-di.fbm-cli.3.5302729en.pdf>
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