China is turning to state-backed risk sharing to unlock credit for private firms, but weak demand and lender caution raise questions over how far the move can reignite growth
In a bid to breathe life into its slowing private economy and bolster credit flows to small and mid-sized enterprises (SMEs), Beijing has unveiled a 500 billion yuan (approximately $72 billion) state-backed loan guarantee programme, part of a broader fiscal-financial stimulus aimed at stimulating investment and domestic demand.
The initiative, released on Tuesday by the Ministry of Finance and multiple state agencies, is designed to expand access to credit for private firms that have been struggling amid weak demand, rising costs and tightening financial conditions.
Under the plan, guarantees will cover a wide range of borrowing needs from medium- and long-term investment loans to working capital and daily operational financing – including factory upgrades and shop renovations.
What the plan offers
Under the scheme, the Chinese government will shoulder a larger portion of lending risk, covering as much as 80 per cent of qualifying loans, a move aimed at encouraging banks to extend more credit to private companies.
The authorities have also raised the maximum loan size eligible for guarantee support, allowing firms to borrow larger amounts than under earlier programmes.
The loan guarantee facility will be in place for two years, providing medium-term certainty for lenders and borrowers. In parallel, the finance ministry has rolled out interest subsidies for small and medium-sized enterprises and extended consumer loan subsidies, including support for credit card instalment payments, through the end of 2026, signalling a broader push to stabilise consumption.
Why Beijing is acting
The targeted support comes amid clear signs that China’s private sector has lost momentum.
Business sentiment has been dampened by weak domestic consumption, subdued demand for credit and cautious lending from banks worried about rising bad loans and falling profitability. Many private firms complain that they face higher financing costs and tighter credit conditions compared with state-owned enterprises.
Total retail sales of consumer goods eked out a modest 3.7 per cent rise in 2025, underscoring the fragility of domestic demand even as exports remain resilient.
By boosting guarantees and reducing risk for lenders, policymakers are aiming to unlock a credit bottleneck that has particularly constrained small and micro-businesses.
Mixed signals from banks and markets
Despite official optimism, there are doubts over banks’ willingness to significantly ramp up lending to private firms. While government guarantees reduce risk for lenders, they do not eliminate concerns over loan quality or future repayment capacity, particularly in sectors with weak demand.
This mismatch between policy intent and market behaviour has been evident in recent financial operations. Liquidity injections and targeted rate cuts by the People’s Bank of China have sometimes failed to translate into meaningful increases in private credit, prompting policymakers to combine monetary tools with direct fiscal backing.
What it means for China’s economy
The guarantee programme is one of several measures Beijing has introduced to shore up growth without resorting to broad stimulus reminiscent of past cycles.
Other initiatives include extended subsidies for equipment upgrades and consumer loan support, reflecting a strategy that blends encouragement of private investment with efforts to boost consumption.
However, guaranteed loans alone may not be enough to reverse private sector malaise if broader structural issues, including slow consumer demand, demographic headwinds and uneven implementation at the local level, are not addressed.
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