Ivan Chung, senior vice-president at Moody's Investors Service Inc, said that in late 2013, market sentiment was totally different. Liquidity was tight, and the market was anxious about the scale of local government debt, which had not recently been tallied.

Then, on the last day of 2013, the National Audit Office disclosed the size of local government debt: more than 10 trillion yuan. And later came the NDRC's move to allow rollovers of LGFV debts.

"It was like all of a sudden, the fate of chengtou notes became clear," Chung said.

Guangdong helps kick off new era

Local governments 'need to refinance debt'

Some of the money raised by new chengtou issues went into urban renovation projects and infrastructure, which helped offset the downward pressure of the sagging property market this year. However, the benefit did not come without a cost.

The major cost was that the market turned a cold shoulder to private companies' bonds. Many companies had to delay planned bond offerings, and some issues failed for lack of bids.

"We've suggested to several of our clients to delay their issue plans because the current cost of debt is too high. How can these private firms finance at above 8 percent yields? They are not State-owned enterprises," said a broker with a securities firm who declined to be identified.

The chengtou segment is now so dominant that it accounted for nearly 90 percent of the new corporate notes on offer in th epast quarter.

Referring to numerous LGFVs that have rarely been prudent in their borrowings, Xu Gao, chief economist with Everbright Securities Co, said: "While the bond market has been liberalized, not all the participants are market-oriented entities."

The real solution is for these entities to exit the market, Xu said.

Public projects such as roads, gas pipelines and affordable housing, which are critically important for China, should be built by a more "proactive" fiscal policy, Xu said.

Questions still linger over a possible chengtou default. Xu and many other analysts said it is almost impossible for local governments to allow that to happen because a single default would cast a shadow overall chengtou notes and trigger systemic risks.

That view sustains the market's appetite for chengtou, at least for now.