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

Studying China’s credit market, we find improved price efficiency and paradoxically, worsening segmentation as, amid government-led credit tightening, perceived government support for state-owned enterprises (SOEs) causes the credit spreads of non-SOEs to explode relative to their SOE counterparts, deepening the already existing SOE premium. This segmentation, driven by the emergence of government support in credit pricing beyond the SOE label, also divides the content of price discovery, with non-SOE significantly more informative of credit quality and SOE more sensitive to government support. Examining its real impact, we find that non-SOEs are losing their long-standing advantage over SOEs in profitability and efficiency.