"The regulators, local governments, and financial institutions alike will need to tread carefully and rewind their financial liabilities patiently," it said, noting many of the trust-related liabilities were built up as part of stimulus measures during the global financial crisis.
"It will be foolish to use the name of moral hazard to blaze the trail. If they did, the house of China's financial system could also be burnt down," it said.
To be sure, not everyone believes bailing out the trust's investors will benefit the financial system in the long run.
(Read more: Is China really running out of cash?)
"Implicit guarantees in shadow banking foster excessive investment, as expected returns are higher for the investor (which has no downside) than society (which pays for downside via government or bank bailouts)," JPMorgan said in a note.
Concerns over government debt levels have risen recently. China's state auditor said in a report last month that local governments owe almost $3 trillion in outstanding debt, much of it raised via trusts. The debt pile is viewed as one of the biggest threats facing the country's economy, with concerns that much of it cannot be repaid as it was used to fund non-profitable projects.
"Credit is still locked up in these projects," Patrick Chovanec, chief strategist at Silvercrest Asset Management told CNBC. "Even though there's plenty of money being dumped into the Chinese economy, there doesn't seem to be enough money to go around to actually fund growth."
He is concerned about the decision to bail out the Credit Equals Gold trust.
"This bad debt did not suddenly become good. Some entity which is yet to be named was directed by the government to provide the money and take on the loss," he said. "Brushing this kind of bad debt under the rug doesn't really solve anything."
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1