There is a kind of financial fraud scheme called a Ponzi scheme. A basic difference between reasonable fund raising and a Ponzi scheme is whether the promoter intentionally, repeatedly and systematically lies to investors about the fund's real profitability, while using the money of subsequent investors to pay inflated dividends.

Wu was not that candid about the real profitability of the fund she raised. She promised unrealistically high investment return rates to investors.

This is not an isolated case. Such irresponsible fraud in the name of private credit foundation has happened before.

The Rural Credit Foundation (RCF) was established in 1984. At its height in 1996, the RCF had 21,000 township-level branches, 24,000 village-level branches and a financing scale of 150 billion yuan ($23.85 billion).

Due to high volumes of non-performing loans, these branches turned to the government for help.

In July 1998, the State Council issued the Provisions on the Cancellation of Illegal Financial Institutions and Activities, and the branches were banned.

Therefore, we can't say that we have loosened control on the financial sector. The problem is that it is much easier for the financial market to slide into chaos rather than stay on the right track.

There is plenty of money to be supplied by private lenders and there are plenty of small-sized private companies in need of private loans.

The crux of the problem, due to the asymmetry of information, is for those private lenders to find the right private borrowers.

Without a well-developed personal credit system, the cost for every private lender of evaluating clients is just too high.

The current financial reform has a problem: It encourages person-to-person lending.

I'm not optimistic about its prospects. If this kind of lending were feasible, there would have been no banks in the first place.

The informational cost of matching lenders and borrowers together cannot be reduced unless effective credit evaluating systems were put in place.

They can consist an information sharing platform that keeps track of irresponsible financial behavior. More transparency can help us reduce the risks of financial malpractice.

Xue Zhaofeng is a research fellow with National School of Development at Peking University.

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