Dong Shunsheng, chairman of Liren Education Group based in Wenzhou, Zhejiang Province, was detained Friday for criminal charges, as the case concerning the company's private fundraising finally entered the judicial process after three months.

The middle school operator, founded in 2003, announced October 31 that it would stop paying down its debt to private creditors due to financial difficulties, and offered to restructure its 2.2 billion yuan ($349.11 million) debt, including turning it into equities, media reports said.

The announcement caused big ripples across Taishun county, as most of its residents, from migrant workers to farmers, had lent money to the company, chinanews.com reported.

"Liren's assets are fully under the government's control, and no other entity or individual can transfer, hide or deal with such assets. The government will register, examine, confirm and deal with the creditors' claims by law. The creditors' legal rights will be protected by law," the county government said Friday.

"Dong's detention was expected, otherwise the local government could not mitigate people's rage," Zhou Dewen, president of the Wenzhou Council for the Promotion of Small- and Medium-Sized Enterprises, told the Global Times. "Some locals have protested in front of the county government's building and broken through the gate."

"People are asking why the authorities did not take action until now. For years, Liren Group had been illegally raising funds from local creditors, and despite reports from many people, local officials failed to issue any warning. Where's the supervision? This is shameful," Zhou said.

 Dong was not alone in facing the music. Zhejiang Provincial Higher People's Court last month decided to maintain a sentence of capital punishment on Wu Ying, head of Bense Holding Group, who was found guilty of illegal fundraising. Wu's death sentence is still awaiting a final nod from the Supreme Court.

There are many enterprises in Zhejiang and in the Yangtze River Delta, similar to Liren and Bense, which have already or are about to go bust due to financial speculation, Zhou said.

"It was difficult for a private firm to get loans from the banks to start a school business, so Liren borrowed from the local residents who trusted the company. However, the company did not focus on its core business, but, instead invested the money in real estate and mining, sectors that were both hurt by macro tightening policies last year," Zhou said.

The hollowing-out effect on certain industries caused by companies venturing into financial speculation has caused some concerns.

"A true market economy should be based on the real economy, not an economy that's gone awry (into financial speculation)," Zuo Xiaolei, chief economist at Beijing-based Galaxy Securities, told the Global Times.

"Capital always refers to machinery, equipment and raw materials. But nowadays when people talk about capital in China, they are merely talking about finance."

"The current global financial crisis was a result of financial innovation without regulation. If China follows this skewed path, the hazardous fallout will be much bigger than that caused by the crisis in Western countries," Zuo said.

Mixed factors are giving entrepreneurs incentives to take on riskier business, Gu Shengzu, an economist and vice president of China National Democratic Construction Association, said at a forum in Yabuli, a ski resort in Heilongjiang Province, over the weekend.

While the real estate bubble has led to profits in China, the oversupply of the yuan has depressed industry profits, Gu said.

He cited other factors such as decreasing exports due to the global financial crisis, the appreciation of the yuan that had eaten into exporters' profit margins and the lack of progress in financial reforms that is making it difficult for small firms to raise funds.

"The crisis in Wenzhou calls for a revival of the entrepreneurial spirit in key industries," Gu said.

Many scholars and entrepreneurs at the three-day forum also urged deeper financial market reforms, including opening up the financial service sector to bring about more competition.

The Wenzhou city government has submitted a plan to the State Council to set up the nation's first financial reform experiment zone, where the development of private equity and micro-credit firms will be encouraged.

"There are already thousands of micro-credit companies, and before going ahead to allow more to launch, the government should first check if and how many of them have used the funds to support the real industries and how many are speculating," Zuo advised.

"It is irresponsible for many local financial regulation offices to only approve the establishment of the financial institutions but not supervise them well," she said.