Concerns are growing about a potential ponzi scheme in China after investors protested at a branch of Huaxia Bank in Shanghai this week over products they claim have failed to pay out.

They were structured as limited partnership funds that took private equity stakes in auto companies and pawn shops, with investors promised a yield of 11% after one year for a minimum initial outlay of Rmb500,000. They were due to pay out at the end of November.

These particular funds were issued and managed by Commercial Finance Asset Management, although the investors claim they bought them at the Jiading branch of Huaxia Bank.

However, Huaxia Bank says it is not a distributor of this product, and that any sales person who sold it did so without bank authorisation. It has fired a salesperson from the Jiading branch, local media report. Police and the Shanghai Banking Regulatory Commission are investigating.

But the case has caused wider concerns about the largely unregulated sale of so-called “wealth management” products, which last year racked up Rmb17 trillion ($2.7 trillion) in China and is on course for a similar sum this year. It is understood there are as many as 2,000 such products, with tenors ranging from three months to two years.

In October, Bank of China chairman Xiao Gang labelled these products a Ponzi scheme in which issuers are paying investors through new product sales, and he warned that they posed a systemic risk to the country’s entire financial system.

The problem is that these funds are loosely regulated, with issuers not required to obtain any formal approvals prior to launch, notes Lillian Zhu, analyst at Shanghai-based consultancy Z-Ben Advisors. This is seen as exposing retail investors to the risk of fraud.

“There are no clear rules regarding product registration and fundraising, while management of these products is a black hole,” she suggests.

Wealth management products are launched by banks, securities firms and private equity firms, but under their classification, the only thing these issuers need to do is inform their respective regulators about their plans for launch.

In stark contrast, mutual funds must go through a rigorous approval process that often takes months of back and forth questioning from the China Securities Regulatory Commission.

Zhu stresses that while these products promise high returns, their transparency is very low. “Nobody really knows how they are actually run and how they generate returns,” she says.

Banks have to comply with strict regulations regarding their capital, but wealth management products are treated as off-balance sheet items, making this a grey area for regulators.

However, so far there is no sign that regulators are set to tighten up on the sale of wealth management products, possibly because the pool of funds is too big to clear out, says Zhu.

“The regulators may do it step-by-step, and they may limit the number of products that can be launched in the first place, but it is a very difficult job [to clean this up],” she adds.