At stake was a report published by Goldman analysts including Shuo Yang last Tuesday, which highlighted margin risks and potential credit losses from banks’ exposure to local government debt. Yang, a former official at the China banking regulator, estimated that the “implied loss ratio of credit portfolio in debt investment book” could reach 25% for Merchants Bank, compared with 6% on average for lenders under its coverage.

A representative for Goldman declined to comment.

Shares of Merchants Bank have lost 12% in Hong Kong since Goldman cut its target price for the second time in three months with a neutral rating. The US bank now has one of the lowest target prices for the Chinese lender, according to data compiled by Bloomberg.

Merchants Bank argued that Goldman’s report is “illogical” in the way it calculates the potential losses, “lacks basic common sense,” and also overestimates its exposure to the local government financing vehicles. 

Eoin Treacy's view

The Chinese banking sector is independent in name only. The government has no qualms about using the sector’s resources to further its long-term development goals. When that means supporting infrastructure development to industrialise the economy, banks were forthcoming with loans and earned strong margins. Now that government priorities have changed, bank liquidity is constrained and asset quality is deteriorating.