Studying China’s credit market, we find improved price efficiency and, paradoxically, worsening segmentation as perceived government support for state-owned enterprises (SOEs) caused non-SOE credit spreads to explode rather dramatically relative to their SOE counterparts amid government-led credit tightening. Interestingly, the post-2018 credit-market stress helped improve price efficiency within non-SOEs, while SOEs saw no such improvement and instead became sensitive to issuer-level measures of government support, marking a shift of SOE premium beyond the SOE label. We further document the real impact of the deepening credit misallocations: non-SOEs in aggregate are losing their long-standing advantage in profitability over SOEs in China.