Highly-leveraged bets lure investors with 15% yields

China's wealthy are flocking to investment products that buy bank-issued securities and soup up returns using leverage. That is, they use borrowed funds to buy additional securities. If the securities end up with a higher rate of return than the borrowed funds, then the investment product can make high returns.

Elm BV, a special-purpose vehicle used by UBS Group AG, has sold 3.7 billion yuan ($555 million) of structured notes in 18 offerings since 2015 with yields as high as 15 percent, data compiled by Bloomberg show. Goldman Sachs Group Inc, Societe Generale SA and Guotai Junan Securities Hong Kong Ltd have also designed such products, which often use leverage to invest in US currency capital securities. Chinese banks sold at least $27.7 billion of Basel III notes offshore since the first issuance in 2014.

"I expect demand for such structured notes to continue growing as the Chinese are still looking for better yields given the current low returns on Asian bonds," said Richard Zhang, assistant chief executive officer at Huarong Investment Stock Corp, an international unit of one of four State-owned asset managers. He warned that in a crisis, structured notes using leverage would suffer greater losses.