The Macroeconomic Costs of SOE Default

Kaihua Deng and Yu Xiao

Emerging Markets Finance and Trade, 2025, vol. 61, issue 6, 1644-1660

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.

Date: 2025
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DOI: 10.1080/1540496X.2024.2424334

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