Authorities in the eastern Chinese province of Zhejiang have detained two people they described as "violent terrorists," police said in a statement on Friday.
Police had seized explosives and weapons, including knives, from the unidentified men in a dawn raid around 5.00 a.m. local time, Zhejiang's Wenzhou municipal police department said in a tweet on its official microblog account on the Twitter-like service Sina Weibo.
"An investigation into the incident is under way," the tweet said.
It said police had acted on tip-offs relating to activities involving "a criminal gang" in the city.
Local residents living in the Shuixin neighborhood of Wenzhou's downtown business and government district of Lucheng said the entire area had been surrounded by armed police during a raid and shootout in the early hours of Friday morning.
A local businessman surnamed Hou said he saw "around 20" special police as well as several dozen regular police.
"They were firing guns and everything," he said. "The area is sealed off now."
An employee at a company based in Lucheng, surnamed Hong, said local news reports were saying that two of the suspects had been "executed" during the raid.
"It's pretty frightening to think of the deaths and injuries they could have caused to others," Hong said.
Police officers who answered the phone on two separate occasions at the Lucheng district police department declined to comment, however.
"Sorry, I don't know the details," each replied.
Two people said shot dead
Repeated calls to the Wenzhou municipal government offices rang unanswered during office hours on Friday, while calls to the Lucheng district government offices failed to connect.
A Lucheng resident who declined to be named said he had heard gunshots during the raid, in which tear gas was also fired by police.
"There were noises at around 3.00 a.m., and then the fighting started at around 5.00 a.m.," he said. "I heard seven or eight gunshots, and one burst of automatic gunfire."
"At first I thought they were firing tear gas, as it was a very loud noise," the resident said. "We didn't know what was going on, because we were asleep."
"We woke up thinking there had been a gas explosion. There were a lot of police at the scene."
According to the resident, two people were shot dead during the shootout.
"There were two or three vehicles full of riot police, as well as regular police and local officers," he said.
"I heard two of them came over here planning to plant a bus bomb," he said, adding: "I saw them carrying two guys away, anyway."
No mention of the ethnicity of the captured or slain suspects was made in local media or police reports.
Chinese authorities launched a nationwide "strike hard" anti-terrorism campaign in May 2014 in the wake of a May 22 bombing attack on a crowded marketplace in Urumqi, capital of the troubled northwestern region of Xinjiang, that left 43 people dead.
But the mostly Muslim Uyghur ethnic group has long complained of aggressive police raids on Uyghur households, day and night, which often spark clashes that are later styled by the ruling Chinese Communist Party as "terrorist attacks."
Dilxat Raxit, spokesman for the Germany-based World Uyghur Congress exile group, said he hasn't received any information about the case.
"The government has made a lot of fuss and released a lot of this kind of news copy, which has let to a campaign, partly overt and partly covert, to forcibly send Uyghurs back to Xinjiang," Raxit said.
He said more transparent media reporting of the issues would mean less public discrimination against Uyghurs.
Reported by Wong Lok-to for RFA's Cantonese Service, and by Yang Fan for the Mandarin Service. Translated and written in English by Luisetta Mudie.