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After receiving dozens of phone calls and text messages from banks touting cheap, unsecured and easy-to-get consumer loans, Eric Zhang visited one of China’s largest lenders in June and borrowed 400,000 yuan ($57,600) at an interest rate of 4%.

But there was a catch -- he had to sign a letter promising the money wouldn’t be invested in property or stocks. That didn’t stop Zhang. A few days later, he’d found a merchant who helped him make a fake purchase and move the cash to his brokerage account.

“I don’t think the bank can track the money and identify its real use,” said Zhang, who works at a Shanghai-based private equity firm. “It’s a great trade for me,” he said, after seeing his fresh stock investments surge 6% in one month.

Zhang’s story is playing out across China as retail investors embrace the euphoria of the biggest bull run since 2015. Banks and financing platforms are being swept along as punters look for quick cash to bet on the world’s most volatile equity market. It’s a dangerous strategy both for already overextended households as well as lenders, one that’s drawing closer scrutiny from regulators.

Authorities are also partly to blame. With the economy reeling from the pandemic, policy makers have pumped out liquidity and eased curbs on shadow banking to backstop small businesses and struggling families. The easy money has fueled arbitrage with retail investors and corporates tapping the cheaper rates to invest in everything from high-yielding structured deposits to wealth management products and stocks.

Leverage has climbed even as millions of Chinese lost their jobs during the pandemic. Household debt rose to a record 59.7% of gross domestic product in the second quarter, doubling from 2012, thanks to a housing boom and the rise of online lenders such as Ant Group, which has made it easier for consumers to borrow via its ubiquitous Alipay app.

The build up of risk has unnerved regulators. In a notice to banks last month, the People’s Bank of China asked lenders to report data on consumer credit extended jointly with internet platforms to give it a clearer picture of about $6.6 trillion in outstanding consumer loans. Credit extended by fintech startups, peer-to-peer lenders and many other channels remain unregulated.

“Unlike credit card debt, the use of consumer loans is harder for banks and regulators to monitor,” said Chen Hao, a Shanghai-based analyst with CIB Research. “Once money goes into the stock market, it will bring sizable risks to banks given the current volatility.”

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