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Goldman Sachs ends up in the crosshairs of China, in particular of the financial newspaper Securities Times, controlled by the Beijing government. Reason: having cut the rating on the securities of some Chinese banks, a factor which immediately fueled the sales of shares listed on the Hong Kong stock exchange.
In a note released the day before yesterday, Wednesday 5 July, the analysts of the American banking giant actually announced the decision to downgrade Agbank’s rating from “Neutral” to “Sell”.
Downgrade also for the securities of the Industrial and Commercial Bank of China (ICBC) and Industrial Bank, whose valuation went from “Buy” to “Sell”.
Goldman Sachs’ judgment has further fueled fears about the banking sector made in China, which is already paying for the effects of an economy, the Chinese one, which has reported a recovery from the crisis triggered by the Zero Covid policy which is decidedly less sustained than hoped by Beijing.
The effect of the downgrade was immediate, and the Hong Kong stock’s benchmark sub-index, the Hang Seng Mainland Banks Index (.HSMBI) slipped 3.6% in Wednesday’s session, sinking to its lowest value in nearly four months, and reporting the worst daily session in eight months.
Goldman Sachs motivated the rejection of the ratings with investors’ fears, linked to the exposure of Chinese banks to the debts of local public administrations and the risks that such exposure represent for the profitability of institutions.
What’s more, unlike other central banks battling the scourge of stubbornly high inflation, the People’s Bank of China has ushered in a new round of rate cuts to shore up economic fundamentals , which however risks destroying the profitability of the banks.
Returning to the issue of banks exposed to Chinese local government debt, a Reuters article explains what Goldman Sachs’ concern is.
Local public administrations in China have created some financing vehicles, in English LGFV, in order to finance the growth of their economies and investments in infrastructure.
The point is that the debts of these LGFV vehicles, according to IMF (International Monetary Fund) estimates, have risen to the monstrous figure of over 9 trillion dollars: a time bomb, and a significant systemic risk hovering over the second largest economy world.
Some analysts, Reuters pointed out in another article in another article, have characterized these local government financing vehicles (LGFVs) as a “black hole” of the Chinese financial system. China shrugs. Result: at least until the end of May 2023, according to official data released by the Beijing authorities, the sales of the well-known “pearl bonds” by these LGFV financing vehicles – which among other things are issued as ‘foreign debt’ in the Shanghai Free Trade Zones – have more than doubled since the beginning of the year to a record value of 72 billion yuan, the equivalent of $10 billion, almost double the value of the bonds placed last year.
China itself must be a little worried, given that the central bank People’s Bank of China, according to some sources questioned by Reuters, has already warned the commercial banks, inviting them in the last few hours to be more vigilant on the risks associated with the bonds that , in general, are issued in the Shanghai Free Trade Zone. And this move would in itself demonstrate how the debts of local administrations are also making the central government nervous, so much so that the LGFV vehicles, for a few weeks now, could issue pearl bonds only with the approval of the authorities.
These financing vehicles have in fact thrown themselves into the Free Trade Zone thanks to the offshore nature of the market, as opposed to the onshore one to which access to LGFVs is prohibited after the launch of stricter rules in 2021.
Going back to Beijing’s wrath against Goldman Sachs, this manifested itself through the state-controlled financial newspaper Securities Times, one of the most important circulated in China.
In an editorial published today, the Securities Times wrote that the downgrade announced by the Wall Street giant was based on “pessimistic assumptions”.
“Being bearish on Chinese banking fundamentals based on pessimistic assumptions is not recommended,” wrote the financial newspaper, speaking of “a misinterpretation” by Goldman Sachs analysts.
However, the beware of Goldman Sachs launched by Beijing has only intensified the sell on the securities of Chinese banks.
Bloomberg in an article recalls that, precisely, Goldman Sachs has a sell rating on banks listed on the Hong Kong Stock Exchange Industrial and Commercial Bank of China, Agricultural Bank of China and Bank of Communications.
The securities of the other Chinese banks Bank of China and China Merchants Bank are instead rated neutral, while , Postal Savings Bank of China Co. and China Construction Bank Corp. enjoy a “buy” rating, also signed by Goldman Sachs.
Bloomberg recalled JPMorgan’s precedent.
Last year, JPMorgan analysts branded some Chinese Big Techs as “uninvestable” in what turned out to be a real gaffe.
The editorial staff responsible for editing the reports of JP Morgan’s research division had requested that the description ‘uninvestable’ be removed from the 28 notes written by analyst Alex Yao and his team, before the reports were published on March 14, 2022. But the publication had taken place, triggering a $200 billion sell-off on Wall Street and Asia.
It is certainly not the first time that Goldman Sachs has ended up in the crosshairs of a state for its judgments. Its analysts have also been subject to strong criticism in Italy, for the attention they have launched on the BTPs, even quite recently.
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yet another slap from Goldman Sachs in the face of Italy it arrived just a few months ago, with the phrase: “Shortate 10-year BTP against the Bonos”, or Spanish government bonds. In addition to infuriating the Italians. Goldman’s slap – which also pitted his outlook on the trend of the BTP-Bund spread – also came in the same days as the Italy alert launched by Moody’s.
Goldman Sachs had also been among the investment banks that had issued more than one warning to Giorgia Meloni even before her victory in the 2022 general election.