Under the plans announced by the municipal government, the wealthy coastal city of Wenzhou, aims to channel private money into local businesses through formal institutions - mainly small credit firms, the official Securities Times said, citing officials.

These credit firms will be allowed to issue bonds via private placements while qualified credit firms could be turned into rural banks, the newspaper quoted Zhang Zhenyu, head of the municipal government's finance office, as saying.

Wenzhou, in eastern Zhejiang province, is known throughout China as a Mecca for private entrepreneurship and grey-market lending.

A string of bankruptcies last year - which spawned suicides and disappearances by entrepreneurs unable to repay high-interest loans - prompted a visit by Premier Wen Jiabao and a decision to bring underground financing out of the shadows.

In March, China's cabinet approved the launch of a financial reform pilot project in the city, which it hoped to replicate across the country later to tame the underground lending market where interest rates can reach 100 percent.

Several Wenzhou-based companies have submitted applications to national regulators to set up rural banks, trusts as well as insurance and securities firms, the Securities Times said.

The city will also develop specialized asset management companies and provide support for major projects through asset securitization and bill issuance.

"(But) regulator departments will be very strict in approving new financial institutions. The financial reform won't be done overnight," the newspaper quoted Zhang as saying.

The city will publish an index to track changes in local borrowing costs as early as this month, Zhang said.

Some 30 small loan firms have already registered with the government since March, with total registered capital of more than 8 billion yuan ($1.28 billion), according to state media.

A surge in bad loans in Wenzhou has highlighted difficulties facing the free wheeling city, as private firms cannot get enough loans from state-owned banks while exporters are struggling to cope with weak demand and soaring wages.

The average non-performing loan ratio at banks in Wenzhou reached 3 percent by the end of August - the highest level in at least a decade, according to local media.

Wenzhou is awaiting cabinet approval to allow the city's residents to make direct overseas investments in yuan, the newspaper quoted Wu Guolian, head of the local branch of the People's Bank of China, as saying. Such a move would be a big step towards liberalizing capital account transactions.

China's premier-in-waiting Li Keqiang said this week that the country must embrace market-based reforms to help sustain economic growth.

($1 = 6.2285 Chinese yuan)

(Reporting by Kevin Yao; Editing by Sanjeev Miglani)

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