China’s financial regulator asked banks to respond to a bearish research report on the sector by analysts at Goldman Sachs Group, underscoring heightened sensitivity in Beijing toward negative market commentary as the economy slows.

The National Administration of Financial Regulation communicated with several of the largest Chinese banks after Goldman analysts cut ratings on some shares and lowered price targets on others, people familiar with the matter said, asking not to be named discussing private information. The regulator told banks to respond appropriately, without giving specific guidance, the people said.

The NAFR didn’t respond to a Bloomberg request for comment. Neither did representatives of Industrial & Commercial Bank of China and Agricultural Bank of China, both of which were downgraded by Goldman to sell.

China Merchants Bank addressed the Goldman report in a clarification statement dated Friday, saying it had “misled some investors” and was “illogical.” The bank’s rebuke followed a similar rebuttal in the state-run Securities Times newspaper last week. One of China’s largest macro hedge funds has also criticised the report.

The unusually public backlash to Goldman’s research has put a spotlight on official efforts to counter negative investor sentiment toward markets and the economy. A prominent finance writer and two of his peers were suspended from a social media platform for spreading “negative and harmful information” about stocks in late June, a move that raised fresh questions about access to independent information in the world’s second-largest economy. 

In its report published on July 4, Goldman analysts led by Shuo Yang, a former official at the China banking regulator, highlighted risks of lenders’ exposure to local government debt. Potential losses could weaken earnings growth, hurt capital accumulation and thus affect dividend payout levels, the analysts said. 

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This isn’t the first time Wall Street research has proved controversial in China. The last high-profile saga involved an “uninvestable” call on Chinese Internet firms by JPMorgan Chase last year, which eventually cost the brokerage a senior underwriter role in a stock listing. The incident underscored the tricky path global banks have to navigate as they ramped up their businesses in China, while still giving clients access to candid research on the country’s turbulent markets.

Goldman’s report landed at a time when investor concerns are mounting over the health of China’s debt-laden local government financing vehicles. Worries that banks may incur losses from these LGFV debts started spiraling after some state-owned lenders began to offer extra credit support to the vehicles. 

Chinese bank shares had already taken a beating, with a Bloomberg Intelligence index of lenders tumbling 14% as of Tuesday from this year’s high in May and wiping out US$78 billion in market capitalisation. Under pressure from China’s monetary easing and tepid loan demand, banks are facing renewed challenges after authorities asked them to extend debt relief to help the struggling property sector. 

China Merchants Bank, which saw target prices trimmed by Goldman twice in less than three months, argued that the report is “illogical” in the way it calculated the potential losses, “lacks basic common sense,” and overestimated its exposure to the LGFVs. 

Chinese macro fund Shanghai Banxia Investment Management Center dismissed the note on Monday, saying the US bank’s prediction that local government debts would sink Chinese banks’ profits and push up their bad loans will likely be proven wrong. The state-backed Securities Times last week urged the market not to take a bearish view on Chinese banks based on “pessimistic assumptions” which are “misinterpretations” of the facts. BLOOMBERG