China continues to actively improve its legal framework to attract foreign investment and ensure sustainable economic growth. One of the most significant recent updates is the revised “Provisions on Payment Guarantees for Small and Medium Enterprises (SMEs),” which took effect on June 1, 2025. These Provisions aim to eliminate practices such as payment delays and the imposition of unfavorable conditions on the weaker party, and are critically important for anyone doing business through a Chinese subsidiary that may be considered an SME, or with Chinese partners who are SMEs.
Why is this important?
Payment delays have long been a problem for SMEs in China, seriously undermining their financial stability and hindering development. Large companies often abuse their position, delaying payments and using “back-to-back” payment terms, creating a cascading effect of problems throughout the supply chain. The new Provisions are intended to change this situation.
Key Changes and Their Impact:
Clear Payment Deadlines: A limit of 30 days is set for government agencies, and 60 days for large enterprises, from the date of delivery of goods or provision of services. This significantly reduces the timelines traditionally used in China.
Prohibition of "Back-to-Back" Payment Terms: The new Provisions explicitly prohibit requiring SMEs to accept terms that link payment to their counterparties’ receipt of payment. This means large companies can no longer shift payment responsibility onto SMEs.
Mandatory Disclosure of SME Status: SMEs are required to indicate their status in contracts. While there are no direct penalties for non-disclosure, courts may refuse to apply preferential terms if the SME does not disclose its status.
Minimum Late Payment Interest Rate: The interest rate for late payments cannot be lower than the prevailing annual lending rate in China.
SME Classification: A key aspect of the revised “Provisions on Payment Guarantees for SMEs” is a clear definition of small and medium-sized enterprises (SMEs). The standards established in the Provisions classify enterprises as medium, small, and micro-enterprises based on three main parameters: number of employees, annual revenue, and total assets, taking into account specific industry threshold values. For example, for an industrial enterprise, the criteria for being classified as small are: a workforce of 20 to 299 employees and an annual revenue of 3 to 20 million RMB.
The reviewed Provisions represent an important step towards creating a more fair and predictable business environment in China. Understanding the new rules will allow you to minimize risks and maximize opportunities for successful business operations.