Caixin Weekly | Behind the Rapid Growth of Inclusive Finance (AI Translation)

财新周刊｜普惠金融高增长背后

Over the past seven years, China's inclusive micro and small enterprise (MSE) loans have grown rapidly, with outstanding balances surpassing 35 trillion yuan—over five times the 2017 year-end amount. Their share in overall loan balances has also risen from under 6% to 13%. According to the People's Bank of China (PBOC), as of the end of the second quarter of 2025, the outstanding balance of inclusive MSE loans was 35.57 trillion yuan, a year-on-year increase of 12.3%, 5.2 percentage points higher than overall loan growth. In the first half of 2025, these loans increased by 2.63 trillion yuan. Inclusive MSE loans are defined as credit provided to micro and small businesses, individual industrial and commercial households, and business owners with a single credit line below 10 million yuan[para. 1].

State-owned banks are aggressively pursuing inclusive finance due to regulatory assessments, where inclusive finance often carries substantial evaluation weight compared to other credit sectors, thus driving banks to prioritize it[para. 2]. This growth, however, is prompted more by policy emphasizing social responsibility and counter-cyclical credit extension rather than pure commercial logic. During economic downturns, banks might naturally contract lending, but current guidelines urge continued support even as rising non-performing loan (NPL) ratios and negative operational cash flows among MSEs pose risks[para. 3].

Risks have grown alongside rapid expansion. NPL ratios are rising, and low-interest loan products create arbitrage opportunities, attracting illegal loan intermediaries who help clients forge documents for bank loans. In May 2025, newly issued inclusive MSE loans had an average interest rate of 3.69%, down 0.66 percentage points year-on-year, while five-year housing loan rates remained above 4%. Regulators have issued multiple warnings about illegal intermediaries, and banks have begun self-inspections to sever ties with non-compliant third parties[para. 4]. However, some see this as a regional rather than a systemic national issue[para. 5].

Every year since 2018, inclusive MSE loans have consistently seen double-digit growth, averaging 25% from 2019-2023 and maintaining a focus in commercial banks even as 2024’s increase settled at 14.6%. This growth is bolstered by performance assessment mechanisms, where inclusive finance accounts for over 10% of branch rankings in major state-owned banks, well above other credit indicators[para. 6][para. 7]. The emphasis on inclusive finance is more about political and social responsibility than profit maximization[para. 8]. The regulatory focus has also evolved, with recent targets shifting toward preserving scale, stabilizing rates, optimizing structure, and improving quality rather than simply maintaining high growth[para. 10][para. 11].

Large state-owned banks have overtaken rural financial institutions as the primary lenders to MSEs, now holding nearly 43% of the inclusive lending market. Six major banks individually maintain trillion-yuan balances, though growth rates now diverge: for instance, in 2024, Agricultural Bank of China led with a 31.29% balance growth, while Construction Bank, an early mover in inclusive finance, slowed to 12.01%[para. 13][para. 14][para. 15].

Expansion is partially driven by the immense number of market participants—the MSE sector now features more than 60 million inclusive credit accounts, covering about one-third of China’s registered business entities, which topped 188 million as of September 2024. Growth also stems from innovations like supply chain finance and technical practices such as splitting large corporate loans into smaller units to qualify as inclusive finance[para. 16][para. 17]. Supply chain finance, especially in construction and among joint-stock banks, has seen rapid growth in recent years[para. 18].

Concerns about asset quality persist. Traditonally low-risk collateral loans are experiencing higher NPL ratios than unsecured credit loans, mainly due to collateral value depreciation in a weak property market, causing some borrowers to strategically default[para. 20][para. 21][para. 22]. There is also a problem of inflated collateral valuations, known as "high-appraisal high-loan," to extract excessive loan amounts, sometimes in collusion with intermediaries[para. 23]. Illegal loan intermediaries thrive due to low loan rates, tight MSE liquidity, and pressure from performance targets at the grassroots level of banks, leading to increased fraud[para. 25][para. 26].

The sustainable development of inclusive finance will depend on technology empowerment, such as digital risk assessment based on alternative data. Pioneers like Construction Bank have led these efforts but now face a new wave of data fraud by sophisticated third parties. Regulators have mounted nationwide crackdowns on illegal intermediaries since 2023, and in 2025, strengthened warnings and self-regulation continued across many provinces[para. 29][para. 30]. ■