BEIJING, April 29 -- China's onshore bond market may remain volatile amid economic reflation but the credit market is unlikely to see systematic risks, according to a report by investment bank China International Capital Corp. (CICC).

The onshore bond market has experienced significant correction since the start of the year, with the treasury bond yield curve steepening and the corporate bond credit spread widening.

"These recent developments are driven by a reflationary macro environment and more frequent credit default events, while they are exacerbated by the crowded positioning in the bond market and rising supply of bonds going into 2016," said the report.

In addition, the crowded positioning, the potential impact of VAT tax reform, as well as continued acceleration of bond supply growth have all contributed to the recent volatility in the onshore credit market.

The economic reflation caught the bond market by surprise as there was a consensus coming into 2016 that the central bank would make at least two rate cuts. On the other hand, chatter regarding VAT tax reform levying a 6-percent tax on non-sovereign bonds also exacerbated the recent sell-off, said the CICC.

The investment bank believes that amid the volatility, economic reflation and ongoing credit-risk re-pricing, systematic risks in China's credit market have actually been reduced on the macro level.

"In our view, the three main risk factors for China's bond market have been diffused in stages since 2015," said the report.

Factors in reducing credit risks have included the progression of the local government bond swap program, the ongoing economic reflation and recovery in commodity prices, and the revival of the property market since 2015, which has greatly improved the cash flow, profitability and the credit-worthiness of property developers.

Furthermore, the report noted, credit defaults are unlikely to fester into systemic risks, as the overall market capitalization of corporate bonds stood at 5.8 trillion yuan (899 billion U.S. dollars), or merely 8.5 percent of GDP, as of the end of March 2016.