The Guangdong International Trust and Investment Corporation had debts of £2.6bn or $4.37bn, twice the market's expectations and double its assets.

It could be China's biggest bankruptcy since the communists took power in 1949.

Commentators say this episode will dent foreign confidence when considering investment in China.

Gitic, which was backed by the provincial government of this prosperous Chinese region, borrowed extensively from foreign banks to fund infrastructure and building projects.

The trust has also backtracked on earlier hints that foreign lenders banks would have priority when it came to distribution of the remaining assets.

Headline news

"Provincial trust files for bankruptcy, personal deposits to be paid by provincial government," proclaimed the front-page of the Guangzhou Daily, the best-selling morning paper in Guangzhou, home of what had been the trust.

Some funds were aimed at improving housing

Newspapers in nearby Shenzhen also reported the bankruptcy, saying deposits would be protected, though interest would not be paid.

Most of the Gitic depositors were in the southern province of Guangdong and that probably accounted for the reports, as China has taken pains not to alarm small investors, analysts said.

The national media, however, ignored the news, as Beijing seemingly concluded there was no need to spread the embarrassing word to other parts of the country.

Closed for business

Gitic was closed by the central bank in October because it was unable to repay debts.

Little has been published about the company since then and Chinese journalists have said they were told not to write about the issue.

The trusts's liquidation and trustee committee has met with more than a hundred representatives of foreign bank creditors, but allowing each institution to send only one representative.

Each foreign bank was also allowed to ask only one question and answers were sketchy at best, said a participant.

At a similar meeting for domestic creditors earlier in the day, no questions were taken, sources said.

"It was a very rough sketch of the situation." So far neither the creditors nor the public has been told what why Gitic became so heavily in debt.

Trustee committee chief Wu Jiesi told reporters that domestic and foreign creditors would be treated equally in bankruptcy proceedings, but he went on to say 779m yuan in debt owed to domestic individuals would be repayed with government funds.

"There are over 20,000 individual creditors, and that is a wide area of impact," said Wu, who is also assistant to the governor of Guangdong province.

"If that were not handled carefully, it could affect social stability," he added.