Chinese Investors Are Discovering the Joys of Structured Products

The good old days are back. In China, anyway:

Structured deposits offer higher returns than regular savings accounts and are tied to bets on assets from currencies to gold. They have been around for years, but the sums outstanding have soared recently. In July they stood at a record 9.71 trillion yuan ($1.42 trillion), up 52% in a year, according to data provider Wind.

….The investments are a form of structured product. In the U.S., this broader asset class enjoyed solid growth until the global financial crisis, when products issued by Lehman Brothers suffered steep losses. In 2013, the Securities and Exchange Commission introduced stricter disclosure requirements for structured notes, bonds that contain a derivative component.

….However, many of these structured deposits in China have structures where the terms are “set so far off that investors can almost always get the advertised maximum return,” says Ms. Wan at Moody’s. In a 91-day product recently marketed by Weihai Blue Ocean Bank, the small lender from eastern Shandong province offered the equivalent of 5.28% a year if gold prices in London, now around $1,183 per ounce, stay between $300 and $2,200. If not, customers will receive 1.65%.

What could go wrong?