Wenzhou is widely known to be permanently flooded with private funds seeking the highest return available in China's restrictive investment market.

It was widely reported that the "hit" funds established by various groups of Wenzhou businesspeople were responsible for excessively driving up property prices in second-tier cities throughout the country.

Some of these funds were said to have been used in hoarding pork, maize and even garlic, causing shortages and staggering price fluctuations that affected the livelihoods of millions of people.

What seems certain is that many Wenzhou businesspeople have deposited part of their savings with underground banks to earn interest at rates significantly higher than those offered by licensed banks.

"The interest we are getting from the pawn shop is at least three or four percentage points higher than the bank's quoted term deposit rates," said Tang Minda, a manager of a private enterprise in Wenzhou.

Financial experts hold the view that the financial gray market was born out of the introduction of credit guarantee agencies in the mid-1990s. Initially, these agencies were mainly government-invested and policy driven, charged with improving loan access for local small- and medium-sized businesses.

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The first guarantee company in Wenzhou was launched in 2003. For the service they provide, guarantee companies normally charge clients a 3 percent commission on the amount of the loan.

As demand for their services grew, guarantee agencies started to lend directly to their clients instead of acting as a bridge between borrowers and banks.

Other companies that deal with clients' money, such as investment advisers, have joined the ranks of the gray-banking market.

"At the moment, there are at least 240 guarantee agencies, asset-management and investment consultancy firms in Wenzhou engaged in lending and deposit businesses," said Yi.

It is estimated that new loans from the 39 guarantee agencies in Wenzhou in the first nine months of 2010 amounted to 5 billion yuan ($754 million), compared with 2 billion yuan from banks.

The total amount of deposits at the underground banks is not known. But judged by the popularity of such deposits among Wenzhou residents, it is believed to be large.

"I can earn as much as 3,000 yuan a month in interest income, which is nearly the same as my salary, by depositing 100,000 yuan at a pawn shop," said Tang. "All my friends have money saved at underground banks," he said.