Regulators are aiming for better bond investor protection

"The whole solar energy industry has been deteriorating since market liquidity tightened in the second half of 2013, and that will affect companies' cash flows" this year, the regulator said.

Shadow banking offers no cause for alarm: Experts

Trust firms' revenues at risk

Fitch Ratings said on Thursday said that "the likely first default of a Chinese corporate onshore bond will be positive for the market in the long term as it will instill greater discipline to price credit risk more effectively".

Previously, many defaults in China were averted after local governments, State banks or asset management firms provided emergency funds or debt extensions.

Fitch analyst Wang Ying said that the Chaori default may signal a shift in the government's stance toward a greater tolerance of outright corporate defaults.

"We expect a reduction of onshore lenders' and investors' risk appetites, which could pressure frailer companies' liquidity, especially in sectors challenged by cyclical downturns and persistent capacity surpluses," Wang said.

"It may also prompt further regulatory progress to provide more clarity on the legal process governing domestic bankruptcies and restructuring, which should benefit both onshore and offshore creditors in the long run," she added.

Chang Jian, chief economist in China at Barclays Capital, said that high debt repayment pressures in a slowing economy, along with increasing maturity mismatches in the official and shadow banking sectors, suggest greater liquidity risks.

"The government's challenges of deepening reform, creating a more market-oriented economy and ensuring stable growth are huge," she said.

Chang said sentiment in the high-yield bond market could be hurt by a default, but "risk-free" assets would likely be supported, given the currently easier liquidity conditions.