SHANGHAI - Wenzhou police announced on Tuesday that a shoe company owner killed himself after becoming steeped in financial troubles.

The police declined to name the man, who they said owned four shoe-manufacturing companies. In response to his death, rumors spread online saying that he had jumped from a building because he was having difficulty paying off about 400 million yuan ($62.5 million) he owed to underground banks, which operate in a gray area of the law.

In Wenzhou, many businesses have been starved of loans as the country tries to fight inflation by pulling back the reins on credit. Finding their usual source of cash no longer appealing, many have turned to underground banks.

"Small and medium-size firms that are already burdened with rapid rises in labor and production costs are facing financing problems as well," said Zhou Dewen, chairman of the Wenzhou Small and Medium-sized Enterprise Development Association.

Zhou said recent increases in interest rates and reserve requirements have raised businesses' financing costs from 40 to 50 percent above what they were in 2010.

In response, the black market in Wenzhou has begun to take the place of local banks as the most important source of financing for the city's construction boom. Taking the greatest advantage of the situation are underground lenders, who operate in a gray area of the law and make loans that carry interest rates as high as 200 per cent a year.

Without so much as a warning, the high risks involved in underground banking have caused the city great damage.

According to reports, many business owners who were believed to be having trouble paying back loans to underground banks have disappeared since April.

Especially during September, 190 cases having to do with private lending disputes, and concerning nearly 300 million yuan, were filed in courts in Luwan district, where most of the business owners who have disappeared had their factories.

"The collapse of the underground banking system will be the worst consequence for the private money lenders and borrowers in Wenzhou if the troubles with cash flow are not solved," said Chen Gongmeng, chairman of Wenzhou Strategic Investors Federation.

The sudden disappearance on Sept 21 of Hu Fulin, the owner of Zhejiang Center Group, an eyeglasses-making company in Wenzhou, Zhejiang province, was a sign of the financial troubles the eyeglasses industry faces in the city.

"Hu's disappearance was an obvious consequence of the impending collapse of cash flow in the whole industry," said a manager of a local spectacles export company who would only give his surnamed, Zheng. "A majority of us manufacturers and exporters have failed to take out loans from banks and maintain normal production."

He said inflation in China has driven up the price of his products enough to cause his factory to receive 50 percent fewer orders in 2010 than it had in 2007.

Wenzhou's Ouhai district has established three teams that are charged with investigating Hu's case.

"We've confirmed that Hu has disappeared, and we're still not sure whether the rumors saying he left more than 2 billion yuan in debts behind are true," said Xie Chengmin, the senior officer from the district government. "But current information has proved that he borrowed about 130 million yuan from private lenders."

Since this past week, five eyeglasses suppliers have announced plans to stop their production operations. That decision stems from the bankruptcy of Center Group, which had business partnerships with many nearby suppliers and manufacturers.

"Center Group's bankruptcy was just a single case that had to do with failed investments and shouldn't affect the whole eyeglasses industry in Wenzhou," said Tao Zhigang, a senior officer with the Zhejiang spectacles industry association.

Tao said companies in all industries have had financial troubles and those troubles must be overcome if future bankruptcies are to be avoided.

China Daily