Second, its core market, Fenghua, is showing signs of overbuilding. Finally, key shareholders of Zhejiang Xingrun were arrested relating to illegal fundraising, which suggests a significant corporate governance lapse.

"We believe there will be further defaults in this industry as these themes will persist, but they will be limited to smaller companies like Zhejiang Xingrun," Fitch said.

More Chinese cities see home prices decline

First bond default signals market progress

Zhang Zhiwei, chief China economist with Japan's Nomura Securities, shared similar views.

Zhejiang Xingrun is the largest property developer in recent years that is at risk of bankruptcy, Zhang said.

"More property developers will face similar pressures as transaction volumes slow and cash flow conditions tighten, and expect this problem to be more severe for unlisted developers in third- and fourth-tier cities with limited access to financing," he said in a research note.

Zhang maintained that China's property sector suffers from overinvestment and has a significant oversupply problem.

The risk is particularly high in third- and fourth-tier cities, which accounted for 67 percent of housing under construction in China in 2013, he said.

The falling price of land in Fenghua is consistent with the deceleration of home price growth in China over the past few months.

Last month, new home prices in 70 major cities tracked by the National Bureau of Statistics rose by an average of 11.1 percent year on year, slowing by 1.3 percentage points from January.

Prices for existing homes rose 6.4 percent year on year, compared with an average growth of 7.4 percent in January. On a month-to-month basis, 57 out of the 70 cities saw rises in new home prices, fewer than 62 cities in January.

Deceleration of home price growth has changed the psychology between home buyers and property developers and boosted a wait-and-see sentiment, even in first-tier cities with a sizzling housing market like China's capital Beijing.