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The Macroeconomic Costs of SOE Default

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  • Kaihua Deng
  • Yu Xiao

Abstract

We apply the synthetic control method (SCM) to evaluate the macroeconomic costs of a large state-owned enterprise (SOE) bond default in the Chinese province of Henan. By constructing the synthetic Henan using a weighted average of eligible provinces in the donor pool, we found that the economic cost of a high-profile SOE default is substantial: While debt financing cost in Henan soared by almost 100 bps and stayed high over the next five quarters, aggregate financing to the real sectors shrank by more than a third of the synthetic level at the time. Bond issuance froze and new bank loans dropped by a staggering 60% toward the end of the sample period. Consequently, GDP growth rate suffered a slowdown of more than 3%. Our findings point to the importance of local government support in understanding the macroeconomic consequences of SOE defaults in an emerging market.

Suggested Citation

  • Kaihua Deng & Yu Xiao, 2025. "The Macroeconomic Costs of SOE Default," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 61(6), pages 1644-1660, May.
    • Handle: RePEc:mes:emfitr:v:61:y:2025:i:6:p:1644-1660
    DOI: 10.1080/1540496X.2024.2424334
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