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| The Impact of Implicit Guarantees within Business Groups on the Default Risk of State-Owned Enterprise Bonds |
| RAO Han, WANG Lu, GUO Jie
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| School of Economics and Finance, University of International Relations;School of Economics, Renmin University of China;Bank of China |
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Abstract “Implicit guarantees” are often used to study government bailout models for state-owned enterprises (SOEs). Their “implicit” nature carries two potential implications. First, implicit decision-making: governments do not provide guarantees based on publicly announced rules but instead act discretionarily according to circumstances and parameters unknown to the public. Second, implicit behavior: the government's guarantee or bailout actions themselves are sometimes not publicly known. This is particularly evident when bailouts are conducted either through fiscal funds or via internal transfers among affiliated entities, with the latter typically being more opaque. This paper refers to the implicit guarantee model that combines fiscal bailouts and internal transfers as the “dual implicit guarantee” model. It does not aim to propose a new model but to emphasize that implicit guarantee resources inherently originate from dual sources. Building on this, the paper employs theoretical modeling to gain a deeper understanding of the macro-level risks associated with implicit guarantee models from the following two perspectives.
First, the study investigates why implicit guarantees often fail to effectively mitigate the credit risk of SOEs. The capacity for internal transfers as an implicit guarantee offers two benefits to the government or SOE groups: one is the ability to liquidate corporate liquidity in advance (referred to as liquidity value), and the other is the capacity to retain some high-quality assets of a firm without bailing out the entire entity (referred to as industrial value). While this allows the government to preserve more assets without excessive fiscal expenditure, it exacerbates SOE credit risk in two ways. Initially, a weaker internal transfer capacity can alleviate SOE credit risk by easing fiscal distress. Conversely, a stronger internal transfer capacity may incentivize the government to abandon bailing out certain firms altogether, opting instead to transfer their funds and assets to conserve fiscal resources while retaining assets. Furthermore, internal transfer capacity amplifies the impact of fiscal conditions on SOE credit risk and weakens the mitigating effect of government guarantee willingness (i.e., government-firm affiliation). This occurs because the liquidity value offered by internal transfers becomes more attractive under poor fiscal conditions (governments facing fiscal strain are more inclined to transfer rather than bail out), while the industrial value is more appealing when guarantee willingness is high (governments with stronger affiliations can preserve more assets of defaulting firms through transfers).
The above conclusions partially explain the real-world phenomenon of SOE bond defaults despite the presence of implicit guarantees. By dissecting the liquidity and industrial values of internal transfers and their associated indirect risk effects, this study further advances the understanding within internal capital market theory regarding the impact of internal transfer behaviors.
Second, using a Bayesian model, the paper illustrates how implicit guarantees can also induce strong risk spillover effects; that is, the public default of a single firm may lead to a decline in the financing capabilities of numerous other SOEs. Primarily, since implicit guarantee decisions lack full transparency to the market, an unexpected public default leads investors to suspect causes such as insufficient government guarantee willingness or poor fiscal conditions. This information effect inherently affects the financing of other SOEs in the same region. Moreover, under the dual implicit guarantee model that accounts for internal transfer behavior, investors may further suspect that defaults are likely due to the proactive transfer of high-quality and liquid assets away from the firm. This further strengthens the risk spillover effect because the liquidation value of such defaulting firms is lower. Additionally, since both poor fiscal conditions and strong guarantee willingness incentivize internal transfers, trust in fiscal conditions can mitigate risk spillover, whereas trust in government-firm affiliation may instead exacerbate it.
These conclusions provide a more comprehensive explanation for why SOE bond defaults easily trigger risk spillover in reality and further analyze the potential macro-level risk implications of the tunneling behavior discussed in internal capital market theory.
Beyond deepening the understanding of the underlying logic of macro-level risks associated with implicit guarantees, this study offers direct policy insights in the following aspects. First, it demonstrates that higher asset liquidity (a key factor influencing transfer capacity), while helping firms better cope with forced default risk, may conversely increase the active default risk of group enterprises. Second, it shows that enhancing government-firm affiliation or market belief in it may not prevent and could even worsen macro-level risks. Furthermore, the modeling approach in this paper can be extended to analyze financing and guarantee financing issues for all group enterprises.
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Received: 13 April 2025
Published: 27 February 2026
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