With more than $16 million in debts she had no hope of repaying, Zheng Zhuju did what scores of other business owners in the eastern Chinese city of Wenzhou have done in recent months -- run away.

More than 90 bosses have fled and two have committed suicide in Wenzhou -- renowned for its factories specialising in everything from cigarette lighters to shoes -- after borrowing from private lenders at very high interest rates.

Underground lending has flourished in the city and other parts of China in the past 12 months as authorities clamped down on official financing channels and major banks favoured large state-owned enterprises.

China's private lending market is worth an estimated four trillion yuan ($628 billion) -- or 10 percent of gross domestic product -- fuelling concerns about a potential explosion in bad debts.

Nowhere is it more developed than in Wenzhou, whose 400,000 private companies have earned the city a reputation for business savvy in a country where many big enterprises are state-controlled.

Zheng was among those who flourished early on, setting up an appliance store which made her an admired businesswoman with a fleet of luxury cars.

With a trusted reputation, she borrowed from more than 300 small business owners, pooling their money and channelling it into lucrative property investments and high-interest loans to other companies.

As China's economy slowed, however, the scheme collapsed: property values plunged, her borrowers defaulted, and she could not pay back her own creditors.

So Zheng quietly shuttered her store, transferred her remaining assets to her daughter and disappeared in late August. She has since been found and is now in police custody.

One victim, who runs an industrial valve business, lost 1.5 million yuan ($236,000) to Zheng. "This is having a huge impact. We will probably get little money back," he told AFP.

Private lending has boomed in Wenzhou and other cities such as Ordos in resource-rich Inner Mongolia.

Cash-rich individuals and businesses wanting to make better returns on their funds than the low interest rates offered by banks have opted instead to lend their money to small- and medium-sized enterprises -- typically charging annual interest rates of 40 percent or even more.

Nearly 90 percent of Wenzhou's residents and almost 60 percent of the companies engage in private lending, the central bank says, although officially the government says only 20 percent of lending in the city is private.

One financial industry figure likened the underground loan market to betting, as lenders take big risks in search of high returns.

"It's like gambling. These high interest rates are like a casino," said Fang Peilin, chairman of the Wenzhou-based Fang Xing Guarantee Co., which helps small companies get loans by providing guarantees to lenders.

Many small business owners have no choice but to turn to private lenders for financing, despite the punishingly high interest rates.

China's banks are not allowed to charge higher interest on riskier loans and mainly lend to other large state-controlled enterprises, shunning small- and medium-sized firms.

But slowing demand for exports, the lifeblood of Wenzhou companies, along with rising wages and soaring commodity prices have squeezed already tight margins and left many small businesses struggling to repay debts.

The government has reacted to the crisis with alarm. Premier Wen Jiabao visited the city earlier this month, pledging to help small businesses access financing.

Shortly after, the authorities announced measures to help aid companies nationwide by boosting credit, broadening financing channels and offering tax breaks. There is also talk of a massive government bail-out.

Analysts say so far there appears to have been little impact on China's overall economy, but this could change if investments made by Wenzhou business owners, mainly in property and manufacturing, across the country start to sour.

"This local crisis could evolve into a national problem," said Ren Xianfang, a Beijing-based analyst for IHS Global Insight.

"The likelihood of this development has increased recently, as there is growing evidence suggesting that private-sector distress has started spreading across China."

The crisis is already having an impact in Wenzhou.

At Wenzhou's main dealership for German luxury car maker Porsche -- consistently one of the top three for sales in China -- saleswoman Cherry Hu has not sold a $390,000 Carrera sports car in a month.

"There's been a big impact on the economy of Wenzhou," she said. "Especially the luxury car market."