The cost of protecting against a default of the Chinese government touched the highest in nine months on Jan 19 and was still at 89 basis points on Thursday, a level almost 50 percent higher than that paid to hedge South Korean risk, according to credit default swap prices. China has an AA- rating from Standard & Poor's - one notch higher than South Korea.

"Our main concern now is not knowing which corporates could be next in the Chinese government's cross-hairs," said Brigitte Posch, the London-based head of emerging market corporate debt at Babson Capital Management LLC. "The political risk element is no longer to be relegated to background noise at a macro level."

Foreign investors face the possibility of steep losses because Chinese mainland courts don't recognize judgments obtained in foreign courts, although exceptions may be made for Turkey and Italy where the governments have mutual treaties, according to Hong Kong-based restructuring advisers Mayer Brown JSM.

"President Xi's call for greater transparency and rule of law in China continues to be a work in progress," said Suanjin Tan, portfolio manager in the Asia fixed-income team at BlackRock Inc. "Investors would do well to pay heed to this when looking to invest in Chinese mainland companies."

The Shenzhen government is holding talks with several property developers in a bid to orchestrate investments in Kaisa, people familiar with the matter said on Thursday. The government doesn't want stakes to be sold at a discount, one of the people said, asking not to be identified because the discussions are private.

Any stake sale may not help foreign investors in Kaisa, Charles Macgregor, head of Asia high-yield research at Lucror Analytics, said on Friday. While the price of Kaisa's 2020 bonds jumped 8.4 cents on the US dollar on Thursday after the Bloomberg report on the developer talks and were up another 7.6 cents at 51.4 as of 5:13 pm in Hong Kong on Friday, caution is needed, Macgregor said.

"We are somewhat bemused that bond investors seem so buoyant," he said. "We do not believe this would materially improve returns for US dollar note holders."

Shanghai to introduce stress tests for city's banks By Wu Yiyao, chinadaily.com.cn

Shanghai's banking regulator is requiring commercial banks in the city to run stress tests related to credit for realty development, including credit for developers and home buyers, in a bid to curb risk exposure, Reuters reported on Jan 27.

The report quoted a circular from the Shanghai Office of the China Banking Regulatory Commission dated Monday, saying that the CBRC will continue monitoring risks that may be brought by realty development and credit to property companies outside the city.

Market insiders said such move are aimed at curbing risk exposure that may come as a result of slowed economic growth and rising bad loan ratio.

Chinese banks' non-performing loan ratio jumped from 1.16 percent by the end of the third quarter of 2014 to 1.29 percent by the end of the fourth quarter, according to CBRC data.

The CBRC's Shanghai Office said in its latest report that it will guide Shanghai's commercial banks to master risk exposure information and handle the risks in a timely manner.

Shenzhen-based developer Kaisa Group Holdings Ltd failed to make an interest payment which expired on Jan 8, and may face a default on its US dollar-denominated debt.