Wenzhou is a city that's has a total of more than 600 billion Yuan private capital lying idle in hands of local entrepreneurs.

The lack of investment channel for private capital in the city has resulted in a dramatic increase in high-interest-rate informal lending and subsequent economic devastation.

Many business owners even became fugitives.

But now, with the city's first private capital management company officially registered and running on a trial basis, the situation might just be coming to an end.

Huang Yongping, manager of Xintong Folk Capital, said, "Xintong is a test case for legalizing and regulating private lending supported by the government. People who have the money and wanted to invest can come to us, and people who has good projects but lack the fund can come to us too."

Serving as a link between cash-rich investors and cash-strapped SMEs, the company has a registered capital of 100-million Yuan, and is allowed to collect as much as 400-million Yuan from investors and channel them into profitable projects.

But experts are saying there's still more to be done to regulate private financing other than setting up financial institutions.

Zhou Dewen, chairman of SME Development Promotion Fed., said, "Legalizing private financing is a must, and further more, the government should set up an administration specialized to manage SMEs nation-wide under the state council, to better allocate resources as a whole."

In a city where nearly 90% of the households are involved in underground lending, regulating private financing seems to be especially tough.

Yang Xiongwen, director of Economic Info. Commission, said, "Only when the government, private enterprises, banks, and financial institutions working together as a whole, the difficulty in financing can then be solved."

The city is also planning to set up registering centers for private financing in the near future, and hoping to transform itself into a pilot zone for financial reform and innovation.