Few issues divide China bulls from bears as sharply as government indebtedness.

To hear it from the doomsayers, the country is riddled with hidden debts that put it on par with Greece and could pave the way to a full-blown crisis.

China boosters retort that the official debt load is small and that hidden liabilities are more imaginary than real.

The truth lies somewhere between the two extremes.

Many economists and even some officials say borrowing is not yet a problem, but that a spike in debt over the past few years could pose a serious risk if not controlled in time.

Bolstering the case for cautious optimism, the government has indeed started down the path of controlling the problem.

The concerns stem from the global financial crisis, when China used its banks to dole out fiscal stimulus. They issued Rmb17,500bn ($2,750bn) of new loans in 2009 and 2010 and appeared to place greater emphasis on rushing the money out the door than on due diligence.

Praise heaped on China for implementing a stimulus programme that enabled its economy to recover briskly from the crisis soon turned to worries about the bill that had not yet come due.

The government has downplayed the risks, noting that its debt is less than 20 per cent of gross domestic product, remarkably low by international standards.

Victor Shih, a professor at Northwestern University in the US who shines a light on the darker corners of Chinese government spending, says the true figure could be closer to a whopping 150 per cent, when all levels of government and state-owned enterprises are factored into calculations.

The view adopted by many in the market has been one of wariness but not alarmism.

Wang Tao, an economist with UBS, says: “While we think it is difficult to conclude that China’s credit level is too high, the speed of credit expansion has been alarming.”

What is indisputable is that the government has made progress in coming clean about its debt.

For much of 2010, talk of local government debt sounded like conspiratorial whisperings in Beijing. But this year, the national audit office undertook its first study of regional finances.

It found that provinces, cities, towns and counties owed Rmb10,700bn, equivalent to about 27 per cent of the economy. Although some analysts believe this underestimates the scale of the debt, the audit produced the most authoritative figures to date and suggested that the problem was large but manageable.

The government has also gone some way toward ensuring that public finances do not deteriorate much further. It has admonished banks to be more careful in lending to local-government backed projects.

Beijing has also slowly started to reform the fiscal system that led to the explosion of bank lending in the first place.

Technically barred from borrowing money, local governments have created a vast number of arms-length financing vehicles to get around the rules. These are problematic because they are a big part of why it so difficult to get a precise estimate of debt levels and they saddle the nation’s fragile banking sector with a large, uncertain credit risk.

Analysts say it would be far better to allow local governments to tap bond markets directly. After years of discussion, the first such issuance appears to be on the table. Zhejiang, an affluent coastal province next to Shanghai, says it will issue Rmb8bn of bonds this year to fund infrastructure.

But other serious concerns loom. Double-digit growth has helped China keep a lid on its debt-to-GDP ratio over the past decade. The denominator (GDP) has consistently expanded more quickly than the numerator (debt).

As it matures, China’s boom is tapering off and simply outgrowing debt will no longer be an option.

For the global economy, the build-up of debt in China also poses a short-term risk. It is not the risk of financial crisis, but rather that Beijing, in trying to control the debt, will be reluctant to open the credit taps again.