Business News Indonesia's growth slows further in second quarter 2015 PLN hopes to hedge 20% of yearly investment needs Banyu Urip back to full operation after workers’ disturbance The shift by Chinese banks into debt investments, receivables and interbank exposures in order to bypass lending restrictions, as well as the growth of the shadow banking system has made it harder to assess the underlying asset quality of the banks and overall stress in the financial system, Fitch Ratings has said in its recently-published special report.Fitch says China's asset management companies (AMCs) are playing an increasingly important role outside the banks in managing bad assets. It is common for AMCs to purchase assets directly from borrowers, so bad assets are often transferred to external parties without being recognized as nonperforming loans (NPLs).Regulatory forbearance also delays the recognition of asset impairment. These features cloud the veracity of underlying NPL levels at banks and more broadly the transparency around the extent of debt problems in the financial system, it further says.Fitch says this renders NPL analysis less meaningful, especially as banks in China have remarkably similar NPL ratios.“The banks' NPL ratios for local government and property loans are very low because riskier credit often lies off banks' balance sheets. Policy guidance on agricultural and micro lending may also lead to inappropriate pricing,” Fitch says in the report published on Monday.The report says the underlying problem is one of debt sustainability. The rapid rise in leverage in China since 2008 is increasingly burdensome, with the interest cost of servicing China's debt now estimated to have reached 15 percent of gross domestic product (GDP), exceeding nominal GDP growth of below 10 percent.The need to strike a balance between maintaining adequate growth to support employment and ensuring banking system stability means that banks remain exposed to the risks of this unsustainable trend continuing.“Until China allows for more corporate and state owned enterprise defaults, moral hazard will prolong and exacerbate threats to the banking system beyond what reported NPLs indicate,” Fitch says.“The longer weak entities are permitted to roll over their debt, the greater the buildup and cost of servicing that debt, and the greater the strain on the economy.”Acknowledging this concern, the People's Bank of China has reportedly cut official interest rates three times since November 2014, with the latest being a 25 bp reduction to 5.1 percent, effective 11 May 2015.