(Yicai Global) July 6 -- Amid market rumors that Goldman Sachs is seeking to short sell China’s banking industry, the US investment bank said its latest report had been misunderstood and overinterpreted, The Paper reported today. 

Shares in leading Chinese banks fell after Goldman Sachs downgraded some leading lenders, including Industrial and Commercial Bank of China and Agricultural Bank of China, to ‘Sell’ in a report published in July 4. Goldman said investors were concerned about the banks’ exposure to local government debt.

But Goldman reportedly clarified that its assessment was based on three factors: the local government debt exposure on banks’ balance sheets, their earnings risk arising from local government debt, and the impact of such debt risks on different banks.

“The market misunderstood some statements in the research report,” a source at New York-based Goldman said, according to The Paper. “Goldman Sachs did not assume local governments will default on debts. On the contrary, Goldman Sachs believes local government debt risk is controllable.”

The issue can affect banks’ earnings, but the impact varies from lender to lender, the person added.

If local government debts are allowed to be extended, the risk of default will be controllable, according to Goldman’s report. As the balance of local government debts rises, both the extended existing liabilities and new debts will have lower interest rates, resulting in a loss of interest income, it noted.

Local government bonds are tax deductible, so a higher percentage of bonds in local government debt will help banks to mitigate the impact on profit of lower interest income, the Wall Street bank also pointed out. 

Editor: Tom Litting