FOUR operators of private chit funds in one city have reportedly committed suicide in the past couple of months after failing to repay participants. About 20 others have allegedly disappeared from the city with large amounts of money contributed to the funds by neighbours. The events of recent months have highlighted increased concerns about the operation of chit funds which are illegal savings schemes, under which operators offer to invest savings for a pool of investors, with the aim of making a big profit from speculative investments such as property. Unofficial estimates put the value of private chit funds in the port city of Quanzhou, Fujian, at about 150 million yuan (about HK$203 million at official rates). Operators have allegedly mis-spent more than 20 per cent of the fund holdings and stolen up to a quarter. One is thought to have left with 12 million yuan. Some funds failed because the operators used the money to speculate on interest-rate differences between different funds. The experience in Quanzhou highlights the problems of China's banking system. Commercial banking is rudimentary in China. Despite talk of reform in the sector in recent years, state-owned specialist banks still have to follow government instructions on loan and interest-rate policy, which are used to macro-control the economy. This is partly to blame for the emergence of unorganised money markets in rural areas, in which interest rates are very high. According to Mr Qin Chijiang, director of the Finance and Banking Research Institute under the People's Bank of China, private chit funds can be found in most booming coastal provinces, such as Guangdong, Fujian, Jiangsu and Zhejiang. ''This is especially obvious on the outskirts of cities where residents have more surplus but outlets for saving are limited,'' he said. He had heard of foreigners running chit funds, he said. ''I heard that a Singaporean started a fund in Xiamen [a special economic zone in Fujian] and fled with several million yuan. There are also instances involving Hongkong people.'' Mr Qin said that, although there had been chit funds in the past, most were set up to pool resources for locals to buy rare commodities for consumption. But now, most funds were set up to reap staggering profits from speculative activities such as real estate and securities, he said. Mr Qin said the basic problem was the low interest rate offered by state-run banks. Last year, despite continuing income growth, urban savings had increased at a slower rate than in the previous year. Banking officials admitted that the slowdown was caused by investment of surplus funds in more attractive areas, such as stocks. By a conservative estimate, more than 320 billion yuan of deposits had been withdrawn to buy stocks and other securities in the first 10 months of last year. Soaring inflation had also fuelled the growth of illegal financial markets, which usually promised higher interest rates. Mr Qin agreed that the long-term solution was higher bank interest rates. But he thought this would take at least five years. ''At this stage, it is unrealistic to raise interest rates because the inland regions would be put in a very difficult situation,'' he said. ''For example, a 10 per cent interest rate for Guangdong may not be too high because of higher return on investment, but this is not the case in inland areas which have lower efficiency. A higher interest rate would deprive them of the opportunity to obtain funds. ''It is impossible to completely eliminate chit funds because they operate secretly. They will not be unearthed until they fail,'' he said. A more effective way of tackling them was to develop the network of credit co-operatives, which should be given more flexibility to provide a higher interest rate than state banks to attract surplus funds, he said.