On February 1, Chinese state media reported that Ezhubao, an internet-based financial services platform, defrauded nearly one million investors out of more than $7.6 billion in 18 months of operation. This appears to be the largest fraud ever reported in China. China’s Ministry of Public Security has already established a registration system for investors to make claims on their losses.

To attract investors, the company promised to pay interest as high as 15 percent during a period when commercial banks offered around 3 percent interest on deposits. The company promised these high rates through peer-to-peer lending, which matches individual investors with other individuals or businesses looking for loans. Reportedly, most of the projects listed on the Ezhubao website were fake.

Ezhubao is just one of many companies in China’s multi-billion dollar non-bank lending industry, sometimes referred to as “shadow banking,” which is rapidly growing and offers products that state-owned banks do not. Morgan Stanley estimates that the total volume of peer-to-peer lending last year amounted to $33.2 billion across more than 1,500 lending platforms, including those associated with Baidu, Alibaba and Tencent, public companies traded in the U.S. For example, Yuebao, an investment service offered by Alibaba affiliate Alipay, attracted $92 billion in capital in one year.

China’s shadow banking sector has thus far been largely unregulated. The Ezhubao fraud may focus regulatory attention on this area.

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