The credit crisis arising from a flood of loans advanced by underground banking services looms over Wenzhou, the mainland's private business capital.
It has wrecked the city's property sector, driving some speculators to suicide.
The official figures tell the story: in September, Wenzhou was the only one of 70 major cities that reported a year-on-year drop in property prices, with average new home prices declining by an annualised 1.8 per cent, according to the National Bureau of Statistics.
Wang Ye, a businessman in his early 30s, is choked up with emotion when he talks about the roller-coaster ride taken by the housing market, which cost him more than 1 million yuan (HK$1.27 million).
"I borrowed money and bought two flats in 2010, when everybody was upbeat about the property market," Wang said. "Now I am debt-ridden and I have paid a high price for those stupid decisions."
Wenzhou, buoyed by an ample capital inflow from the underground banking system, saw housing prices soar in the past decade as investors went on a buying rage, speculating on flats in the belief that prices would only go upwards.
"You could never imagine how active the market was when the times were good," said Luo Ruzhao, a vice-president at Wenzhou Yijiayi Real Estate Agency. "People rushed to buy properties regardless of the high prices."
A single apartment could change hands more than 10 times within a month, Luo said. Speculators did not buy for their own use. Instead, they played "pass the parcel'' in the belief that everyone could keep making profits.
In 2010, Wenzhou, a third-tier city, reported property prices higher than any second-tier city, thanks to the home-buying euphoria.
High-end flats in the city sported price tags of up to 100,000 yuan per square metre, on par with Shanghai, the country's commercial capital.
The speculative fever was fuelled by underground banks, where operators collected massive funds from "depositors" before relending them to borrowers at lofty interest rates.
Some bullish housing speculators borrowed millions of yuan from loan sharks to buy properties, punting on further price increases. A single buyer could own more than 10 flats in the city, according to Luo.
But the credit crisis resulting from the collapse of illegal private lending has led to a plunge in home prices of about 40 per cent since the first half of last year.
Falling victim to weakening external demand and a slowing domestic economy, most of the underground banks failed as borrowers could not repay loans, while dozens of major operators either fled the country or committed suicide.
Some borrowers had to dump their properties to repay the loans.
At the same time, the property market ran out of steam as liquidity was drained from the market by failing lenders.
"It was no surprise to see a collapse of the Wenzhou property market," said Joe Zhou, the head of research in Shanghai at property brokerage Jones Lang LaSalle. "After all, the housing prices there were artificially high, and the fundamentals couldn't support those lofty levels."
Underground banks, which are illegal, have effectively bolstered the economy for years, providing finance for mom-and-pop shops The lenders made a killing by tapping into the country's export boom and the city's renowned entrepreneurial flair.
"Wenzhou people have a deep-rooted habit of speculating," said Zhang Wei, an entrepreneur. "They are quick to buy and invest in any product whose price has the potential to rise in future."
Unfortunately, those bold Wenzhou residents inflated property prices into a bubble that burst with tragic consequences.
Even at commercial banks, mortgage defaults are on the rise as the ripple effects of the property debacle spread through the financial system.
A loan officer at the Industrial and Commercial Bank in Wenzhou said dozens of mortgage defaults occurred at his branch every month.
"The game is over. No chances for us to cut losses in this round of property investments," Wang said. "Nobody is bold enough now to borrow or buy anything in Wenzhou."