The incident took place in the Majiagou eco-tourism village near the city of Yantai in Shandong province on Tuesday. The report said a tether holding the balloon to the ground broke, and as the balloon rose it ruptured, sending the unnamed 31-year-old woman and the three-year-old boy who were harnessed side-by-side to their deaths.
They were the only passengers. Police said five people had been held in connection with the incident.
It is unclear from mobile phone footage published by newspaper how far the balloon and its passengers fell.
The report quoted emergency response authorities as saying the ride was illegal, and that they were investigating. All tourist activities in the Majiagou scenic area were temporarily suspended.