As an important participant in Chinese market, SMEs are confronted with the tasks of keeping themselves competitive, which concern their survival and future growth. To help Chinese SMEs maintain and improve competitiveness, a theoretical framework is built up through organizing the existing theories and findings in studying SMEs in China. The framework investigates competitive strategy and business environment influencing Chinese SMEs’ performance. Based on data collected from SMEs in China, this study has confirmed the importance of competitive strategy to achieve their competitive advantage. Moreover, there is a negative relationship between competitive pressure and SMEs’ performance.