Focusing on local state-owned enterprise (SOE) bond credit spreads in China during the period 2013 to 2020, we disentangle a province premia component from firms' fundamentals and present evidence of an increasing subnational debt market fragmentation since 2018, which is shown to be associated with previous local SOE default incidences and local government fiscal space. An endogenously estimated local debt to GDP threshold that would exert impact on the province premia is found to be lower than the debt sustainability thresholds suggested by the World Bank and the IMF. Our study sheds lights on the needs for a more market-based risk-pricing and its important implications on debt market functioning, as well as the hidden cost of local government debts beyond its conventional sustainability concerns.