Compared to other bond markets, China’s default rate is astonishingly low. This is largely caused by the government’s implicit promise to bail out SOEs that are in trouble, creating a typical “moral hazard” situation. Recent SOE defaults, however, show that China’s financial regulators are trying to move more strictly against this “moral hazard”. But their task is difficult: Other political goals, like employment and social stability, still often restrain financial regulators from allowing SOEs to fail.
