(Yicai Global) July 11 -- In the wake of Goldman Sachs downgrading of some Chinese banks to ‘Sell,’ citing investor concerns over their exposure to local government debt, China Merchants Bank said the debt risks of local government financing vehicles are controllable.

Goldman’s report “misled some investors and led them to worry about the asset quality,” CMB's investor relations department said in a clarification statement to investors yesterday. The Shenzhen-based lender has received inquiries and feedback from investors related to the report, it said.

Published on July 4, the report explored the possibility that some Chinese banks may be unable to maintain a good balance of provisions, capital, and dividends in the face of declining revenue, so Goldman downgraded Industrial and Commercial Bank of China and Agricultural Bank of China to ‘Sell’ and kept a neutral rating on CMB.

CMB said it had about CNY132.6 billion (USD18.3 billion) of loans to LGFVs on its balance sheet at the end of last year, up CNY9 billion (USD1.2 billion) from the year before and accounting for only 2.3 percent of the bank's total loans and advances.

LGFV investment is small and all local government-related financing, including CMB’s exposure to their bonds, was far lower than Goldman’s estimated CNY1 trillion (USD138.3 billion), the bank noted, adding that the non-performing loan ratio of its LGFV business was 0.14 percent at the end of last year, down 0.49 percentage point from the previous year.

CMB’s asset quality is excellent, and the financing risks of its LGFV business is generally controllable, it concluded.

LGFVs are a financing tool by which local governments in China fund infrastructure projects, mainly in the property, transport, and utilities sectors.

The “implied credit loss ratio in the debt investment book” used in Goldman’s report lacked logic, and the bank's "investment in debt instruments measured by amortized costs" at the end of last year was CNY1.58 trillion, and its assets were excellent, CMB pointed out.

Regarding Goldman’s inference that CMB needs to further confirm CNY34 billion (USD4.7 billion) of non-performing assets invested in debts and CNY34 billion of losses, the lender said all data had been fully disclosed and accrued.

Editor: Futura Costaglione