The privately controlled company, with a market capitalisation of $2.7 billion, has felt the squeeze from falling demand in a sector struggling with overcapacity as the giant economy shifts gears.

It reported a 31 percent decline in revenues and a net loss for the first half of the year. At that time, long-term borrowings were over 8 billion yuan ($1.25 billion).

Chinese authorities are keen for markets to price credit risk more accurately, in part to provide a check on industrial overcapacity, and so are likely to increasingly distinguish between stronger firms and weaker ones, analysts said.

"It's a sign that bailouts are not for everybody and that the slowing economy is taking its toll on the non-investment grade sector," said Warut Promboon, chief rating officer at Dagong Global Credit Rating.

"The strong names will get the benefit of cheap funding because the central bank will keep monetary conditions easy while the riskier credits will have a hard time refinancing because of weakening metrics," Promboon said.

Chinese markets have operated for years under the assumption that most bonds are state guaranteed, highlighting the difficulty of pricing risk in the country.

The first public default, by Chaori Solar, was only in 2014 and since then there has been a trickle of missed debt payments as companies were left to defend for themselves.

It was only in April this year that Baoding Tianwei Baobian Electric Co Ltd became the first state-owned firm allowed to default.

Dollar Debt Plunges

Shanshui's board said in a stock exchange filing it had concluded that it would be unable to repay holders of a bond maturing on Thursday, so had decided to petition to wind-up the company.

The 2 billion yuan bond was issued by its fully-owned subsidiary Shandong Shanshui.

The default would trigger an accelerated repayment clause on its $500 million in dollar bonds due 2020, and so constitute a default event on those bonds as well, it said.

Those bonds, trading around 80 cents on the dollar on Tuesday, plunged to 45 cents on Wednesday after the announcement, before recovering to trade around 65 cents.

The company also has $28 million in outstanding bonds due in 2016, Reuters calculations show.

The company's shares have been suspended since April.

"The call of the hour is for the cement sector to have meaningful consolidation. It suffers from overcapacity and environmental issues, increasing the pressure on players to weed out competition in order to gain economies of scale and sustain market share," said Nancy Koh, a DBS credit analyst in Singapore.

Shanshui's situation has been complicated by a fight for management control, which analysts said had unnerved lenders.

Privately owned Tianrui Group, which owns a 28.61 percent stake in Shanshui, failed earlier this year in attempts to remove most directors of the company. Tianrui's latest proposal to remove directors is due to be heard at an extraordinary general meeting on Nov 25.

Two other major shareholders, China National Building Material holding 16.67 percent of the company and Asia Cement Corporation which owns 20.96 percent, have an outstanding buy-out offer. The terms have not been made public.

"Management tussles accelerated its operational and financial deterioration, on top of being in an industry plagued by overcapacity," said Mervyn Teo, analyst with Lucror Analytics, an independent credit research firm.

Standard & Poor's warned in June of a heightened repayment risk by Shanshui and cut its bond rating to CCC from B-plus.

After Wednesday's announcement, Fitch Ratings lowered its assessment of Shanshui to restricted default rating (RD), indicating a high chance of default, from C.

Other buyers could emerge for Shanshui, Lucror Analytics said in a note.

"We last saw this with the bailout of Shanghai Chaori Solar by a China bad loan bank, Great Wall Asset Management in 2014," the note said. "We believe the most probable outcome could be that the company is taken over by a strong party and bondholders are repaid in full."