For the past four years, a smart Shanghai hotel has hosted a summer get-together of Chinese regulators and policymakers. This year, as before, discussions focused on ways to build a better “ecosystem”. Yet judging by published speeches, participants once again tiptoed around the elephant in the room: the People’s Bank of China and its systemic financial repression.

Through the PBoC’s manipulation of the exchange rate, its balance sheet has grown to about $4,000bn, almost as big as the economy itself ($5,000bn). Lately, the bank has chosen to limit the inflationary consequences of its forex intervention by requiring banks to lock up more of their deposits as reserves, earning just 1.62 per cent (the market-based alternative, issuing sterilisation bills, became costly as yields on its foreign assets fell). PBoC reserves have now risen to $2,100bn, about one-third more than the reserve balances at the US Federal Reserve. As Nomura notes, this accumulation of unusable cash amounts to a tax on the sector, preventing Chinese banks from allocating a larger share of their portfolios to higher yielding investments. Worse, it is a regressive tax, which disproportionately hurts small banks with weak deposit bases.

The consequences are twofold: a shortage of credit to those who need it most (tales of small companies failing to pay utility bills are multiplying) and the disintermediation of the formal banking system. The PBoC has only just begun to keep tabs on what it calls “total social financing”, which on top of net new bank loans includes trust loans, corporate bonds and equity, and funding from insurers. This snapshot suggests that informal financing is growing much more quickly than formal financing.