I was asked this question a few months ago and shared the following response: Christian fiction is a novel or story that includes one or more saved (by "saved" I mean believing that Jesus Christ has redeemed us from our sinful nature. Once saved we have complete and radical trust in Jesus' power to change, restore, forgive, heal and make our lives new) character(s) who face an issue or challenge that pushes the limits of their faith. By the end of the story they resolve the issue or challenge in a way that's consistent with the integrity of the Christian faith. Wow, that's a mouthful and it came off the top of my head.
In Christian fiction at least one of the main characters demonstrates his or her love for God and clearly has a strong desire to lead an active Christian life, even if they miss that mark from time to time. In good Christian fiction they will miss the mark, many times, that makes for a realistic story and good conflict in the novel. Perfect people who handle things in a perfect way aren't real in life or on paper and that's been an ongoing problem with some Christian fiction. But I think as more people come into the genre and more networking is done with readers, authors will learn what readers want and some of the perfect people-isms will go away or the good writers will rise to the top.
In closing, I'll add that I don't believe Christian fiction is a story where the main character lives a life in which they do everything wrong before coming into relationship with Jesus Christ and neither does the Christian Booksellers Association (www.cbaonling.org). This is because in Christian fiction there needs to be a clearly articulated Christian worldview. The character can't have that if they aren't already saved. I think may confuse what I call "Church Fiction", that would be a novel about church drama that does not have a Christian worldview. So, that's my 2 cents. Some would disagree with me, but hey it's my blog.
Many Blessings and Much Love,
My first novel, Issues of the Heart, coming Dec 2009 from Urban Christian Books.