Bond defaults could become the norm

As the central government encourages more central SOEs to delist non-core businesses and consolidate, they could now allow more of these subsidiaries to go under, analysts said.

"The ability of SOEs to repay the debts of their subsidiaries has been constrained," said Zhang Yingjie, head of research at China Chengxin International Credit Rating Co.

"They are now more likely to rely on the subsidies to carry out their own restructuring or asset sales, to repay debt."

China's corporate debt had risen to 125 percent of GDP by the end of 2013, according to Bank for International Settlements. Companies spent 9.5 percent of GDP, just paying down interest and principal.

On Monday, the long-troubled Kaisa Group Holding Ltd, an investment holding company, announced it had failed to honor a $52 million interest payment within the 30-day grace period.

The default, long expected, did not shock the dollar-denominated bond prices of Chinese developers. Moody's Investors Service Inc said the default was within expectation and the overall refinancing risk for the sector remained manageable.

The domestic market has so far been obtuse to understand the Baoding Tianwei situation.

The yield premium of five-year, AA-rated bonds over top-rated notes narrowed 4.5 basis points this year to 149.8 basis points as of April 17, according to data compiled by ChinaBond.

The gap widened 11 basis points last week, after Cloud Live's default.

Zhang Yingjie at China Chengxin International said turnover in the secondary market has shown little change. "Tianwei's default was expected, so its impact on the market is limited," he said.

A wider impact might be a continued rally of the stock market, he said, which would draw capital away from the bond market, adding however the impact has not ended, with previous declines in yield difficult to sustain.

Zhang Li, an analyst at Guotai Junan Securities, said the largest problem now is "too narrow" a yield difference between high-grade and low-grade bonds.

"The frequent individual cases and a high-risk appetite among investors will be a new normal this year," she said.