China has expanded its inclusive finance framework during the 2021–2025 period, with lending to small and micro enterprises (SMEs) growing at an average annual rate above 20%. By October 2025, outstanding inclusive SME loans reached RMB 35.77 trillion—reflecting a sustained effort by regulators to widen credit access for firms that typically lack collateral and face higher financing constraints.

At the same time, borrowing costs have declined. Newly issued inclusive SME loans carried an average interest rate of 3.48% in June 2025, roughly two percentage points lower than the level at the end of the previous planning cycle. For lenders operating in China—domestic or foreign—this signals a regulatory environment increasingly oriented toward lowering structural financing costs for small businesses.

A key development for financial institutions is the introduction of a joint policy package issued by eight central ministries and regulators, including the National Administration of Financial Regulation (NAFR), the People's Bank of China (PBOC), the National Development and Reform Commission, and the Ministry of Finance.

This cross-department coordination is not symbolic—it affects how financial institutions structure products, measure risk, and interact with government-backed guarantee systems.

The policy package outlines 23 measures across eight areas. For banks and non-bank lenders, the most consequential are:

1. Expanding Credit Supply

• Stronger regulatory guidance to increase first-time loans, credit loans, and longer-term lending to SMEs.

• Continued use of PBOC structural monetary tools, which influence funding costs for SME-related credit.

• Support for qualified SMEs to raise capital via the New Third Board and Beijing Stock Exchange—important for investors assessing growth-stage financing pathways.

2. A More Operational Risk-Sharing System

Local governments are encouraged to enhance risk-compensation schemes, guarantee fee subsidies, and performance-based incentives for government-backed financing guarantee institutions.
For foreign banks, this matters because local guarantee programs can meaningfully alter risk weightings, expected losses, and pricing models for SME portfolios.

The new guidance also clarifies several internal supervisory processes that directly affect lenders:

• Regulators will adopt differentiated risk-classification standards tailored to SME lending characteristics, reducing the likelihood of abrupt reclassification or unexpected provisioning requirements.

• Banks are encouraged to increase the space for writing off SME loans and expedite disposal procedures through pilot programs.
  This provides greater predictability in dealing with non-performing SME credit, an area where foreign banks have traditionally been more conservative due to uncertain regulatory handling.

Additionally, regulators emphasize strengthening SME credit data integration across agencies, improving lenders’ ability to evaluate borrower health using shared information—an operational improvement that foreign institutions have long sought.

Large and mid-sized commercial banks are required to maintain a dedicated inclusive finance division. Performance evaluation weights for inclusive lending at branch level must reach at least 10%, while internal transfer pricing (FTP) for SME loans must include no less than a 50 bps discount.

Although primarily aimed at domestic banks, these rules signal market-wide expectations on resource allocation and internal incentives, shaping competitive dynamics for all lenders in China.