SHANGHAI - The first ever death penalty on illegal fundraising in Lishui, Zhejiang province, has sent a chill across the underground banking markets in Wenzhou, a eastern commercial hub haunted by shadow lending, and several other cities around China.

The Intermediate People's Court of Lishui on Monday sentenced three men convicted of fraud to death for illegally soliciting funds from the public. One of them, charged also with flight of capital contribution, was to be executed immediately while the other two were given a two-year reprieve.

Three others, convicted of fraudulent fundraising and illegal pooling of savings deposits, were given sentences ranging from life to three years' imprisonment.

The culprits were said to have raised a total of more than 5.5 billion yuan ($867 million) from about 15,000 families. They admitted to have defrauded more than 1.4 billion yuan of the capital raised.

Although court precedents do not apply in China's legal system, judges usually defer to past court rulings on major cases.

"Although there is no precedent in the current law in China, the judges will tend to defer to follow the case as a reference judgment to be applied in future cases with similar details at other courts," said Ren Ningning, a judge from a court in Wenzhou, Zhejiang province.

She added that more attention would be paid to analyze the cases of illegal fundraising, especially after the outbreak of the credit crisis in Wenzhou in the past months.

By the end of October, 39 suspects were arrested in 38 cases concerning illegal fundraising in Wenzhou and involving 3.6 billion yuan, according to the local police.

"The number of illegal fundraising cases in the city increased rapidly in the last two months and is expected to grow till the end of this year," said Zhou Qingchun, a lawyer from Zhejiang Zhenan Law Firm in Wenzhou.

Zhou added the illegal fundraising cases in Wenzhou would still be judged with respective evidences and details instead of blindly following the judgment in Lishui.

The private sector in Wenzhou recently experienced a severe capital shortage amid the country's tightening economic policies and a downturn in overseas orders. As a result, many cash-starved factories and small businesses have turned to underground banks to raise money at exorbitant interest rates.

As business continues to deteriorate, more and more borrowers have failed to repay their lenders, who are facing the possibility of getting pulled up by their jittery depositors.

The huge underground banking sector in the city nearly collapsed when more than 90 local companies closed down and a considerable number of businessmen committed suicide by the end of September.

"I've already stopped lending money to those small- and medium-sized enterprises in Wenzhou since September as it is too risky to collect a huge amount of money from individuals and lend them out," said Liu Jianxiu, a private lender who used to collect high-interest loans from individuals at a monthly rate of 3 to 4 percent.

Liu added that most of the city's private money collectors have adopted a wait-and-watch policy until the market turned favorable for them to get back in the business.

China Daily