China  ezubao Ding Ning

If the allegations are true it would make Ezubao the biggest fraud ever uncovered in China. (The Associated Press)

Police arrested the maverick founder of China's largest online finance business on suspicion of fleecing 900,000 investors of $7.6 billion, in what could be the biggest financial fraud in Chinese history.

State media outlets reported the arrest of Ding Ning and 20 of his employees late Sunday. State broadcaster CCTV aired purported confessions from two former employees at Ezubao, an Anhui Province outfit that rose from obscurity to become China's largest online financing platform in the span of about 18 months.

Ezubao was the most spectacular player in a booming online investment industry that Chinese authorities have been struggling to regulate. Firms ranging from established Internet companies such as Alibaba to virtually unknown upstarts have flooded into the business, promising higher returns than those at state-run banks, which often offer interest rates below inflation.

Ponzi scheme alleged

Ezubao promised investors that borrowers would pay back loans at interest rates between 9 per cent and 14.6 per cent, but 95 per cent of those borrowers were fictional entities created by Ezubao, a former company executive told investigators.

Behind the firm's rise was 34-year old Ding Ning, an Anhui native who dropped out of school at 17 to work at his mother's hardware factory, where he first gained experience running online sales, according to media reports.

With no technical or financial training, Ding launched Ezubao in July 2014 and opened multiple marketing offices across China. The venture bought expensive ad spots that aired just before the widely viewed nightly CCTV newscast, the state broadcaster's flagship program.

Ezubao appeared to gain Beijing's imprimatur when the gov.cn government website published an interview with Ding in July discussing his life as an entrepreneur. The interview has since been removed from the site.

State media took a far different tone on Sunday as CCTV aired Ding's confession and footage of officials hauling away bags of cash from his home. The Xinhua news agency detailed Ding's extravagant lifestyle and the gifts he lavished on a business partner Zhang Min, including a $20 million villa in Singapore and a $1.8 million pink diamond ring.

"The truth is that it's a fraud ... it's a typical Ponzi scheme," Zhang, the associate, said in her aired confession.

Despite the vast sums cited in the case, Ezubao, which also went by Ezubo on its website, represented just a sliver of China's shadow banking industry estimated to be worth $1.5 trillion as of the end of June, according to Chinese banking regulators.

Independent economists and party officials alike have warned about the danger of unchecked private lending and the political spillover of a large-scale collapse.

After police shut down Ezubao in December, scores of protesters gathered outside a Beijing government building to demand their money back. Simmering anger on social media also spurred public security officials to phone Internet users to warn them against criticizing the Communist Party online.

One investor from Northeast China who lost close to $80,000 told The Associated Press in December that police confiscated her computer and cell phone after she posted online that she might file a petition with the central government.

Fu Weigang, a researcher at the Shanghai Institute for Finance and Law, said difficulty obtaining financing in a state-dominated banking system has for decades driven Chinese citizens into underground borrowing and lending, which also gave rise to countless Ponzi schemes.

But Ezubao was able to take advantage of an influx of mom-and-pop investors in recent years using an Internet model, Fu said, effectively pushing small-scale scams to a countrywide level.

"What they were doing was nothing new in China," Fu said. "But how they were doing it online, and the scale, was unprecedented."