Goldman Is Calling Out China at the Worst Time

As an equity analyst, you want to downgrade your stock ratings just when market sentiment turns. That way, the call has an outsize pricing impact for which you can claim credit. But sometimes, this tactic can backfire.

A bearish research report on Chinese banks by Goldman Sachs Group Inc. has drawn rare rebuttals from a state-owned newspaper and China Merchants Bank Co., a major lender. In a three-parts series titled Testing the ‘Impossible Trinity,’ Goldman argued that lenders’ exposure to a prolonged property downturn and local government debt will lead to non-performing loan losses and shrinking profit margins, and thus threaten their ability to pay dividends. The country’s biggest banks, whose shares have held up well this year, sank after the July 4 publication.