Local investors queued to withdraw their cash and analysts warned that the central government could be backing away from local debt.
Peking's announcement followed a recent capital injection into the Guangdong International Trust and Investment Corp (Gitic) by the provincial government.
Early last month, China's southern Guangdong province sent top officials across the border to Hong Kong to reassure bankers that Gitic had the full support of the government.
At about the same time, provincial officials were in Peking, pleading for cash to help Gitic repay up to $1bn (pounds 600m) in loans to foreign banks and other investors.
Peking refused. In a rare central government strike at a provincial fiefdom, the central bank shut down the nation's second-largest investment firm. It also delivered a blunt message to the Cantonese-speaking leaders of China's richest province, the testing ground for the mainland's 20- year capitalist experiment.
"If China doesn't honour the debt it can forget about borrowing internationally," said one analyst.
Gitic and central bank officials would not comment on the extent of the corporation's domestic or foreign debt, but foreign bankers estimated it had some $500m in short-term debt and $500m in long-term debt. "Gitic is not asset-poor. Its only problem is a mismatch in duration," said Hoong Yik-luen, head of China research at ING Barings.
Other finance industry officials said the company had been hit by a slump in stock and property markets, but it was also using short-term borrowings to fund long-term obligations.
China said late on Tuesday that Gitic, which has interests ranging from finance to property and toll roads to car-tyre production, was closed because of an inability to repay debt.
The Bank of China, one of the nation's big state-run commercial banks, would act as trustee, assuming its debts and assets, and creditors have been asked to register claims before 6 January. Priority would be given to overseas debt approved by foreign exchange authorities and domestic personal savings.
Shares were yesterday suspended in its Hong Kong-listed subsidiary, Gitic Enterprises, which went public last year.
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