The SOE Premium and Government Support in China’s Credit Market

74 Pages Posted: 30 Oct 2019 Last revised: 30 Nov 2022

See all articles by Zhe Geng

Zhe Geng

Fudan University - School of Management

Jun Pan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); National Bureau of Economic Research (NBER); China Academy of Financial Research (CAFR)

Date Written: November 29, 2022

Abstract

Studying China's credit market using a structural default model that integrates credit risk, liquidity, and bailout, we document improved price discovery and deepening divide between state-owned enterprises (SOEs) and non-SOEs. Amidst liquidity deterioration, the presence of government bailout helps alleviate the heightened liquidity-driven default, making SOE bonds more valuable and widening the SOE premium. Meanwhile, the increased importance of government support makes SOEs more sensitive to bailout, while the heightened default risk increases non-SOEs' sensitivity to credit quality. Examining the real impact, we find severe performance deteriorations of non-SOEs relative to SOEs, reversing the long-standing trend of non-SOEs outperforming SOEs.

Keywords: SOE Premium, Government Support, Credit Risk, Price Discovery, Chinese Corporate Bond

JEL Classification: G12, G14, G18

Suggested Citation

Geng, Zhe and Pan, Jun, The SOE Premium and Government Support in China’s Credit Market (November 29, 2022). Available at SSRN: https://ssrn.com/abstract=3473544 or http://dx.doi.org/10.2139/ssrn.3473544

Zhe Geng

Fudan University - School of Management ( email )

No. 670, Guoshun Road
Shanghai, 200433
China

Jun Pan (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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