The spread between the benchmark AA rated one-year commercial paper yield quoted by China Central Depository & Clearing Co over AAA debt has widened by nearly 100 basis points this month, as investors demanded higher yields for holding riskier paper.
That puts it firmly on track for the second-biggest monthly widening on record and the biggest since December 2014.
Missed debt repayments by several Chinese state-owned enterprises led to a corporate bond sell-off this month and heightened speculation that Beijing is resuming a long-running deleveraging campaign.
In its third-quarter monetary policy implementation report released on Thursday, the People's Bank of China said it would improve bond default risk prevention and disposal mechanisms.
That followed a meeting of the Financial Stability and Development Committee, chaired by Vice Premier Liu He, that vowed "zero tolerance" for market misconduct in the wake of the defaults.
But Thomas Gatley, China corporate analyst at Gavekal, said that widening spreads would not necessarily translate into more effective risk pricing in the market in the medium-term.
A rash of private sector bond defaults in 2017 led to investors shunning riskier names altogether in favour of the safest credits, he said.
"I suspect that that's what we'll see this time too, that probably marginal local issuers will struggle to issue at all."
"What we don't get is a broad market where all kinds of issuers can issue and they are differentiated by price ... What we get instead is just they're squeezed out and the bigger firms keep issuing, and there isn't much change to the pricing mechanism."
(Reporting by Andrew Galbraith; Editing by Ana Nicolaci da Costa)