A debt crisis in eastern China's Wenzhou City is casting light on an illegal business run by government officials lending hundreds of millions of yuan to the owners of small businesses.

Money from government officials has been found to be involved in many cases of illegal loans to business owners who are now fleeing the area after finding they are unable to pay back the money, Xinhua news agency reported yesterday.

Private lending in Wenzhou, the cradle of China's private sector, has been booming since the country tightened monetary controls late last year to fight inflation. State-owned banks, under orders to maintain a stable loan-to-deposit ratio, are reluctant to offer loans to small firms such as those in Wenzhou.

That has forced some people to turn to private lenders, mostly illegal, despite the high cost of interest. However, when business doesn't go as well as expected, owners can find themselves in trouble.

Xinhua cited the case of Shi Xiaojie, 80 percent of whose lenders could be government officials who may have given her a total of 800 million yuan (US$125 million).

Shi runs several credit guarantee firms in Wenzhou and has borrowed nearly 1.3 billion yuan from individual lenders at interest rates ranging from 24 to 140 percent, according to Xinhua.

Shi and her husband have been detained on allegations of illegal financing after the couple, who fled Wenzhou last week, were caught by police days later. But the whereabouts of the 1.3 billion yuan remains unclear.

Bank records showed that in August alone, Shi transferred 800 million yuan to an unidentified person, Xinhua said.

"Those officials are now trying to get their money back while keeping a low profile to avoid too much attention," an unidentified lender told the news agency.

A woman, who said she is one of the victims in the Shi case, told Xinhua that her husband, a government official, had lent "some money" to Shi.

"It is driving me crazy that I have no idea where my money is and have no place to complain against that," the woman, who declined to be identified, said.

"I can't tell people how much money I lent to them and have to keep a low profile in seeking my money back," she added.

She said many of the lenders didn't go to police for help as they hoped to get their money back in their own ways.

Meanwhile, the boss of Wenzhou shoe-making firm Zhengdeli killed himself by jumping from his 22-story home on Tuesday.

The boss, surnamed Shen, was believed to be in financial trouble after banks turned down his plea for more money.

His firm has already owed banks 100 million yuan and he is said to have borrowed much more from private lenders, according to yesterday's Oriental Morning Post.