On Tuesday, credit agency Fitch downgraded China's local-currency rating from AA-minus to A-plus.
That demotes the creditworthiness of China to the level of Japan, where total gross debt now exceeds 450 per cent of gross domestic product and the central bank is busy printing money in a desperate attempt to revitalise the economy.
"Risks over China's financial stability have grown," Fitch warned in its statement, pointing out that domestic credit has ballooned from 125 per cent of GDP in 2008 to an estimated 198 per cent at the end of last year.
Even more disturbing, almost half of the recent growth in credit has taken place in China's loosely regulated and largely opaque shadow banking market. This rapid expansion has been driven largely by corporate and local government borrowers.
According to a report published last week by Australian investment bank Macquarie, China's non-financial corporate debt stood at 108 per cent of GDP at the end of 2011. That's well above the 90 per cent level at which the International Monetary Fund warns company debt "becomes a drag on growth", and on the same sort of level as corporate debt in Britain or France (see first chart).
China's local government debt has also expanded fast recently, reaching almost 13 trillion yuan (HK$16.2 trillion), or 25 per cent of China's GDP, at the end of last year, according to Fitch.
Other estimates put the level considerably higher. This week, one former finance minister said local governments debts could now have exceeded 20 trillion yuan.
Either way, ballooning credit levels and the murky nature of China's market have unnerved many observers.
In one recent case, for example, a local government-owned steel company in Lanzhou, the capital of Gansu province, borrowed 2.5 billion yuan through a shadow market trust loan claiming the money would be used for earthquake reconstruction.
However, according to the seismic data archive of the US Geological Survey, there hasn't been a significant earthquake within 100 kilometres of Lanzhou since July 1995, and at magnitude 5.6, that wasn't big enough to cause much damage.
As a result, an increasing number of analysts and investors are worried that money is being frittered away on uneconomic projects and that borrowers could have trouble repaying.
"We could see an asset quality problem in the financial sector in fairly sizable magnitude within the next few years," Fitch analyst Charlene Chu warned yesterday.
Not everyone is concerned. After all, high levels of debt are nothing to worry about if China's borrowers are generating returns big enough to cover their repayment obligations.
That's just what they are doing, believes Qu Hongbin and his colleagues at HSBC, who reckon that returns on capital in China last year were at least 15 per cent. That compares handsomely with the US, where the rate of return is just 10 per cent (see second chart).
Inevitably, others disagree with this analysis. Chen Shao at Macquarie notes that returns on corporate assets are correlated positively with GDP growth and negatively with leverage.
With China's growth now shifting to a lower trajectory and leverage levels rising, returns on assets have sustained a double blow and have fallen from almost 10 per cent in 2007 to just 6.5 per cent in 2011.
"The trend of corporate indebtedness in China is not sustainable," says Chen, warning of "the potential emergence of a corporate debt crisis" which will threaten the country's future economic stability.
Right now it's impossible to say for certain who's right.
But a growing number of investors are deciding not to give China the benefit of the doubt.