A police move to shut down Ezubao, an online peer-to-peer (P2P) Ponzi scheme, has become emblematic of efforts to crack down on a practice that has become rife in China.

This case was thrown into the spotlight on Sunday night (January 31) when it was reported on by official state news agency Xinhua. The article quoted police details of the investigation – the first time such information has been released – revealing the Ezubao Ponzi scheme involved Rmb50 billion ($7.6 billion) and almost one million investors across 31 provinces.

Regulators have been increasingly concerned about illegal fundraising activities by online P2P platforms; this latest scandal follows a clampdown last month on the registration of new private investment companies.

Ezubao had more than five million registered users and allowed affluent investors to buy its products via a mobile application and website. Its parent company, Yucheng International Holdings, started business in July 2014 in Bengbu, a third-tier city in Anhui province in eastern China.

The platform halted trading and began cooperating with a police investigation on December 8 last year. Its website has since been inaccessible.

Ezubao offered P2P products with annual yields of between 9% and 14.6%. It raised $7.6 billion from private investors, with the promise of capital guarantees. But the projects it backed were fictitious and the company paid investors using newly raised funds.

The average annualised yield offered by such internet financing products was 12.18% in January, according to wdzj.com, an online financing product data platform.

“As far as I know, 95% per cent of the backed projects are fake,” Yong Lei, Ezubao’s risk controller, told Xinhua.

“Ezubao is completely a Ponzi scheme,” Zhang Ming, the platform’s former president, was cited by Xinhua as saying.

Mainland P2P platforms have boomed in the past few years, as wealthy investors took risks in pursuit of high yields. Such platforms typically feature the keyword “Bao” (treasury), following the popularity of Yu'E Bao, a money-market fund products launched by Alibaba and fund house Tianhong in mid-2013.

The investigation into Ezubao comes after the Beijing Administration of Industry and Commerce (BAIC) on January 9 suspended new approvals of investment firms using terms such as “investment", "finance leasing”, “non-financing guarantee”, and “wealth management”.

Meanwhile, the Shenzhen government also suspended new P2P registrations last month, according to Red-Pulse, a Shanghai-based market research company. No official announcement was made.

An industry source told AsianInvestor that the BAIC actions were not aimed merely at private fund managers involved in illegal fundraising, but were also intended to tighten shady practices around P2P and internet-financing platforms.

While P2P products became alternative high-risk choices to online MMFs and bank wealth management products, regulation was not clear. At present, a P2P platform is required to register with the commerce ministry in different cities, but there is no formal regulatory body governing the products or company operations.

“The [regulatory] direction is to tighten rules on the P2P lending industry," said Ivan Li, head of financial services for southern China at KPMG. "The rules are to be finalised by the inclusive finance department under the China Banking Regulatory Commission (CRBC), while the supervision and monitoring will be carried out by local financial offices." 

Mainland authorities, including the CBRC, the Ministry of Public Security and the State Internet Information Office drafted new rules over P2P lending on December 28, setting out requirements in areas such as registration and information disclosure.

China is the largest P2P lending market in the world, with 2,612 P2P lending platforms and more than Rmb400 billion ($55.9 billon) in financing funds, according to Red-Pulse estimates. Yet, 1,346 are classified as problematic, with cases in which platforms are facing defaults, lenders have absconded or are under investigation, according to wdzj.com. 

Most P2P platforms operate in Beijing, Shanghai and Shenzhen, according to KPMG.  

“We have observed more bad news [about P2P platforms] in the market in 2015, because credit quality deteriorates amid a slowing economy and tightened rules from the government,” said KPMG's Li.