The move will also widen credit channels for small, private firms now largely shut out of China's state-dominated financial system and offer alternative funding to bank loans and equity fundraising.
Analysts say the longer-term challenge of riskier instruments may also step up reform of China's ratings system, transparency and regulations to better protect investors.
The so-called "junk" bond market is expected to open soon on a trial basis, offering high-risk, high-return corporate debt products to investors, including brokerages, asset managers, and hedging funds, sources with direct knowledge of the matter said.
The market may later open to private equity (PE) funds.
These institutions have so far mainly focused on China's relatively mature stock and government bond markets as a lack of liquidity in the corporate debt market has constrained demand.
Allowing small private companies to start issuing bonds will help deepen the corporate debt market, where issuers have so far been dominated by large state-owned enterprises, listed companies and local government investment vehicles.
The high-yield bond market could be launched in the first half of this year, top securities regulator Guo Shuqing said last week. Traders and analysts believe the market could start with an experimental period for six months to a year.
"High-yield bonds are particularly important for asset allocations of financial institutions which have proprietary securities trading, such as brokerages and mutual funds," said Li Jieming, bond analyst at Sealand Securities in Shenzhen.
"Those firms need to take risks for profits," Li said.
But such risk factors will likely mean that banks and retail investors may be barred from entering the market at least during the experimental period, Li added.
A trader at a Chinese PE fund said he believed that such "risk considerations" may also prevent PE funds from trading "junk" bonds during the trial period. But once allowed entry, risk-oriented PE funds would become primary traders of the high-yield bonds, the trader said.