Acting on suspicions of illegal private fundraising, the local public security department on Friday arrested Dong Shunsheng, chairman of a local education group based in Wenzhou, Zhejiang province.

Six executives of Dong's Liren Group, an education company in Taishun county, are being investigated for allegedly using illegal private lending channels to raise billions of yuan worth of capital, county officials confirmed. But exact tallies of the company's assets and liabilities cannot be made at this time, the officials said.

"We received a report from a creditor last December and have been investigating the matter since then," said an official surnamed Hong with the information office of Taishun county government. "Now we are certain the group has big problems raising money, but the size of their debts is still being investigated."

Liren Group was established in 2003 and modeled on a private middle school that Dong set up. By the time of Dong's arrest, Liren Group had diversified its business to include not only education but also real estate and mining investment.

Last November, the company announced that they would stop paying debts in cash, citing "financial difficulties". Instead, it offered to repay creditors via debt-to-equity swaps, through exchanges of property or by trading free school tuition.

The county government has seized the group assets, and local judicial organs are carrying out an investigation.

An anonymous management-level official of the company said last November that the company had debts in excess of 2 billion yuan ($310 million), while the company's assets are still worth more than 5 billion yuan, China News Agency (CNA) reported on Sunday.

CNA said many local people lent money to Liren Group because the company enjoyed a high reputation in Taishun county.

"I cannot give you the number of creditors, because the investigation has not finished. But people here are staying calm," said Hong.

"I have been hearing that the company was in crisis since last year. The chairman said he is sorry that he did not make money for us. He said he twice tried to kill himself," wrote a netizen with the username "benzhuzhu", who claims to be a resident of Taishun, on Tianya, a popular Chinese Internet forum.

Chen Yi, one of the company's senior executives, told Zhejiang Online that the crisis was triggered by tight monetary policies and a gloomy real estate market. The company's monetary situation went from bad to worse when its investments in a coal mine in Erdos failed to reap a return last year due to limitations on output set by the central government.

The private sector has become a pillar of the local economy, sustaining 90 percent of jobs, Xinhua reported.