A new severe plastic deformation method for manufacturing tubes made of AZ31 magnesium alloy with a large diameter was developed, which is called the TCESE (tube continuous extrusion-shear-expanding) process. The process combines direct extrusion with a two-step shear-expanding process. The influences of expanding ratios, extrusion temperatures on the deformation of finite element meshes, strain evolution and flow velocity of tube blanks during the TCESE process were researched based on numerical simulations by using DEFORM-3D software. Simulation results show that the maximum expanding ratio is 3.0 in the TCESE process. The deformation of finite element meshes of tube blanks is inhomogeneous in the shear-expanding zone, and the equivalent strains increase significantly during the TCESE process of the AZ31 magnesium alloy. A extrusion temperature of 380 °C and expanding ratio of 2.0 were selected as the optimized process parameters from the numerical simulation results. The average grain size of tubes fabricated by the TCESE process is approximately 10 μm. The TCESE process can refine grains of magnesium alloy tubes with the occurrence of dynamic recrystallization. The (0001) basal texture intensities of the magnesium alloy tube blanks decrease due to continuous plastic deformation during the TCESE process. The average hardness of the extruded tubes is approximately HV 75, which is obviously improved.