As foreign investors contemplate the health of the Chinese economy and the ultimate sustainability of the unfolding Chinese miracle, one focus is the level of bad debts held by the biggest Chinese banks.

Some of the gloomiest prognosticators warn that Chinese banks are rife with nonperforming loans far greater than those officially acknowledged by the government and that, sooner or later, a financial train wreck is inevitable.

Other, more optimistic analysts argue that much of the bad debt in the system really is government debt in disguise, and therefore is effectively backed by the massive foreign reserve assets of the central bank.

China has been working since the late 1990's, through a variety of mechanisms, to clean up the banks' balance sheets and prepare them for partial privatization. With direct capital injections from the government and through the transfer of bad loans to specially created asset management companies, debts worth hundreds of billions of dollars have been written off.

More recently, tens of billions of dollars have been raised through the sale of shares in some of the largest state banks to Chinese and foreign investors, strengthening their capital base.

Yet, in testimony before the U.S. Congress in August, Gordon Chang, an author and China analyst, said that even after this cleanup, nonperforming loans at Chinese banks still amounted to 40 percent of the gross domestic product of China, and about half of China's total indebtedness.

Making what he called a "conservative" estimate that excluded many significant bank and government obligations, Chang put China's overall debt- to-GDP ratio at 81 percent. That estimate included government debt to other governments and multilateral institutions, central government debt incurred on behalf of local authorities, and banking system debt. But it excluded welfare system obligations, grain subsidies and debts in the defense sector.

According to China's own calculations, the ratio of state sector debt to gross domestic product stands at only 18 percent, far short of the 60 percent level that is internationally regarded as a threshold of alarm. Few independent analysts take China's data at face value.

Poor accounting standards and a lack of transparency undermine the credibility of official financial data, while some analysts say that they suspect the government may be intentionally concealing bad loans to minimize concerns about debt volume and quality.

"No matter how you calculate this ratio, China has too much debt," Chang told the congressional U.S.-China Economic and Security Review Commission.

How exactly should China's debt be calculated? Part of the answer rests on how "loans" themselves are defined. In significant ways, Chinese bank loans need to be defined differently.

The true value of Chinese nonperforming loans is difficult to calculate, but certainly is "massive," said Louis- Vincent Gave, a partner in GaveKal, a research firm based in Hong Kong. At the same time, he said, outsiders may be overly concerned about the risks.

"The reality," Gave said, "is that Chinese banks have often acted as a financing arm of the government. So it's not like Japan or the United States or France, where you have bad loans that force banks to contract lending, which leads to an economic slowdown. In China, the bad bank loans are actually on the government books."

For comparison, Gave cited the emergency £¿00 million, or $507 million, bridge loan provided last year by the Italian government for a bailout of the chronically troubled national airline, Alitalia.

That loan was replaced in December by a complex financial restructuring in which the airline raised fresh capital from investors and split off a ground services and debt-holding unit, AZ Servizi, in which an Italian state financial company took a 49 percent holding.

In a similar scenario in China, Gave said, a failing airline would simply call the government to say that it was about to fold, and the government would instruct a state bank to issue the loan.

"So in China, this would show up as a bad bank loan instead of a government debt, and it happens all the time," he said.

During China's central planning heyday, virtually all bank loans were "policy loans" mandated by the government with no concern for profitability or borrowers' creditworthiness.

When economic reforms started 25 years ago, lending began a partial shift toward commercial terms. Still, reckless lending remained common among banks that had both cash and a new freedom to pursue business, while lacking the tools to evaluate risk.

According to Jin Liqun, a former Chinese vice minister of finance and now vice president of the Asian Development Bank, many nonperforming loans were accumulated in the late 1990s when economic growth was high but the banking system remained weak.

"Chinese banks took the chance to pounce on what they thought would be good opportunities, but now bankers are much more prudent," he said.

Policy lending undoubtedly has declined, in large part because so much of the Chinese economy is now in private hands. According to the brokerage CLSA, the Chinese private sector is now responsible for more than 70 percent of the country's GDP, and employs about 75 percent of the total workforce.

According to the Chinese government, the quality of bank loan portfolios is starting to improve. State banking regulators reported in August that the percentage of bank lending classified as "nonperforming" fell by 1.1 percentage points to 7.5 percent in the first half of this year.

But some analysts point out that many factors can give the illusion of an improvement. By simply expanding their new lending, for example, banks can show a lower bad-loan ratio, even though the quality of new risk - like lending to speculative real estate developers - may be questionable.

Michael Pettis, an associate professor of finance at the Beijing University Guanghua School of Management, also warns that official Chinese definitions of nonperforming loans differ from internationally accepted standards. Many bad loans are not being properly tallied as such, he says.

Chinese officials themselves remain cautious in their claims on the subject.

Wu Xiaoling, the deputy governor of China's central bank, the People's Bank of China, said this month that Chinese banks still lacked the necessary expertise to lend effectively, and that asset quality remained suspect.

"The task of avoiding a rebound in nonperforming loans is still huge and difficult," she said during a Beijing finance conference a week ago.

But Gave and other analysts downplay the problem, maintaining that much of China's bank debt is more like government debt, and its strong foreign reserve position makes it a creditable guarantor of that debt.

"I just don't see how the so-called train wreck would happen," Gave said. "A train wreck implies a forced seller, and I can't see the Chinese government as a forced seller," he said.

On the other hand, Gave warned, foreign investors looking to put money into Chinese banks should beware of the possibility that a future economic slowdown could motivate the government "to order banks to cough up money in new loans to support flagging growth."

Pettis, meanwhile, noted that China's large foreign currency reserves, standing at around $1 trillion, were matched by a similar amount of government debt. China could not tap those reserves without increasing its net indebtedness, he said.

Chinese debt is a clear concern at a time when both Chinese and global growth are strong and liquidity is high, Pettis said.

"This is as good as it gets: it's the sweet spot," he said. Possible future developments, ranging from an economic hard landing in the United States to a liquidity squeeze in China, would only make things harder.

"Until we know how much hidden and indirect debt there is, no one can honestly say the creditworthiness of the Chinese government is not an issue," Pettis said.