China has announced a trial reform package for the city of Wenzhou, where businesses have been hit hard by a cash crunch.
Under the programme residents in the city are allowed to invest privately overseas and set up loan firms.
It comes after the government's tight monetary policy has made it harder for companies in Wenzhou to get funds.
If successful the Wenzhou package could be introduced in other parts of China, the State Council said.
The cash crunch lead to dozens of cases of bankruptcy in the city.
"In recent years, some of the small and medium-sized companies ran out of capital and some business owners fled," the State Council said in a statement on Wednesday.
Wenzhou, in the south-eastern Zhejiang province, is a major manufacturing centre for eye glasses and lighters, and most of them are made by small businesses.
The proposed loan companies would help small manufacturers overcome a reluctance from big state-owned banks to lend to them because of the higher credit risks.
They prefer lending to the large state-owned companies.
The decision was called a "milestone" by Wang Jianhui, chief economist with Southwest Securities, as it showed the government was willing to lead "the reforms that are urgently needed".
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