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

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  • Zhe Geng
  • Jun Pan

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.

Suggested Citation

  • Zhe Geng & Jun Pan, 2019. "The SOE Premium and Government Support in China's Credit Market," NBER Working Papers 26575, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26575
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    References listed on IDEAS

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    1. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Jack Bao & Jun Pan & Jiang Wang, 2011. "The Illiquidity of Corporate Bonds," Journal of Finance, American Finance Association, vol. 66(3), pages 911-946, June.
    4. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
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    Cited by:

    1. Chunjing Wang & Jinming Qu, 2020. "Analysis of the Pro-cyclical Behavior of Credit Spread in Chinese Bond Market," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-8.
    2. Jiang, Bo, 2024. "The real effect of shadow banking regulation: Evidence from China," Emerging Markets Review, Elsevier, vol. 59(C).
    3. Xiaoming Li & Zheng Liu & Yuchao Peng & Zhiwei Xu, 2020. "Bank Risk-Taking and Monetary Policy Transmission: Evidence from China," Working Paper Series 2020-27, Federal Reserve Bank of San Francisco.
    4. Berkowitz, Daniel & Nishioka, Shuichiro, 2024. "The growth of firms, markets and rents: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 52(2), pages 383-399.
    5. Wang, Yabin & Wu, Sharon Xiaohui, 2023. "Local guarantees and SOE bond pricing in China," China Economic Review, Elsevier, vol. 78(C).
    6. Liu, Tianming & Xiong, Haifang & Li, Yifei & Wang, Zhiqiang, 2023. "The flight to safety during credit recovery: The role of implicit government guarantees," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    7. repec:zbw:bofitp:2021_015 is not listed on IDEAS
    8. Xiaoming Li & Zheng Liu & Yuchao Peng & Zhiwei Xu, 2020. "Bank Risk-Taking and Monetary Policy Transmission: Evidence from China," Working Paper Series 2020-27, Federal Reserve Bank of San Francisco.

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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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