The Chongqing government has come up with a novel way to support the city's cash-strapped small business lenders - asking foreign investors to bail them out. Luo Guang, the president of the city's financial office, plans to ask international private equity houses to extend financing to the so-called xiao e dai kuan - lenders of last resort - which fund small private enterprises that state-owned banks perceive as too risky, three people familiar with the talks said. Staff from Luo's office have approached Hong Kong-based private equity houses in recent weeks, gauging their interest in becoming shareholders in a new fund, worth three billion yuan (HK$3.66 billion), which would provide liquidity to 91 micro lenders, the people said. Chongqing's micro lenders have been struggling to fund themselves, the people familiar with Luo's project said. But their situation is common across the mainland. Legalised in May 2008, the xiao e dai kuan are similar to the subprime lenders that sprung up in the United States before the global financial crisis to extend cash to that nation's riskiest borrowers. These lenders - there are about 4,000 of them on the mainland - have in the past borrowed from state-owned banks and then lent the money to small, private firms at higher interest rates, pocketing a fat profit on the difference. They are permitted to charge four times the benchmark interest rate, which would now be more than 28 per cent. But these lenders have become increasingly cash starved as the central government curtailed banks' lending abilities in an effort to staunch high inflation and deflate the property bubble. The restriction has caused small and medium-sized companies to lose access to bank funding. This private enterprise credit crunch may cause mainland economic growth to slow to 8.3 per cent next year, from 9.5 per cent in the second quarter of this year, according to Societe Generale. 'At the moment, the plan is just a preliminary sketch,' Luo said, when asked to comment about the new funding entity. He said he would visit Hong Kong to talk to partners and refine the plan but was not sure if it could be realised. Luo would not comment on the size of the fund, adding he felt it was too early to make his plans public. 'I can only say it is too early so far,' he said. 'If everything goes smoothly, maybe the shape will be clearer by the end of November.' One fund manager, who said he might participate in the fund, said the high interest the small companies paid the micro lenders meant the sector could be extremely profitable. He added, however, that the best way to invest in a subprime lender was to get as much industry and geographical diversification as possible. 'The Chongqing proposal does not offer exposure beyond Chongqing,' he said. 'I'm concerned that many of the underlying borrowers are struggling exporters or property developers whose sales are falling.' In part, Chongqing needs to support its micro lenders to keep its burgeoning economic growth high. The city regularly appears in league tables as the fastest-growing city in the world. Its economy grew 16.5 per cent in the first nine months of this year, according to government data. Chongqing is not the only city in the country where officials are seeking solutions to fund privately owned companies or micro lenders that in the past provided the small firms with liquidity. Last month, Shanghai said it would set up a one billion yuan fund to acquire minority stakes in micro lenders. It did not say, however, that it aimed to attract foreign investment for this entity. Scores of factory owners in Wenzhou, a private enterprise hub in Zhejiang province, have fled the city after racking up debts with loan sharks, partly because they could no longer get funds from micro lenders. The People's Bank of China has raised the proportion of deposits commercial banks must keep as reserves with the central bank instead of lending the money out. 789b The size of Chongqing's gross domestic product last year, in yuan