Working Paper: NBER ID: w26575
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 Market; China
JEL Codes: G01; G10; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sensitivity of non-SOEs to credit quality (G32) | non-SOE performance deterioration (L25) |
| government bailout (H81) | SOE bonds value (G12) |
| government bailout (H81) | liquidity-driven default (G33) |
| liquidity-driven default (G33) | SOE bonds value (G12) |
| government bailout (H81) | non-SOE default rates (G33) |
| government support + liquidity (H81) | perceived credit quality (F34) |