Another impediment is the dominance of large banks. The four largest banks in China account for 60 percent of the country's total bank lending. While the US banking sector is similarly concentrated, it has far more financial institutions - roughly 18,000 commercial banks, savings and local associations, mutual savings banks, and credit unions, compared to around 400 commercial banks and 3,000 rural credit unions and township banks in China. This means that banks in China on average are larger than in the US, especially in view of the difference in the size of the two countries' GDP.

Large banks tend to lend to large companies in order to save costs. This bias is mitigated in advanced economies by the various flexible financing tools offered by large banks. For example, a small business with a decent credit history can borrow large amounts with a major credit card. This is absent in China.

In the end, it is the crippled financial sector that is driving the wedge between China's large surplus of capital and formal financing for the country's SMEs. Indeed, in some parts of southern China, the informal financial sector is growing to match the size of the formal financial sector.

From the point of view of depositors, participating in the informal sector is a rational choice. Bank interest rates on savings are lower than the inflation rate - and many multiples lower than the rates promised by the informal sector. Default rates in the informal sector are high, and lenders may disappear with depositors' money, as happened in Wenzhou, but, despite these risks, investing in the informal market can still be a better choice than keeping one's money in the bank.

The record of the last 20 years shows that the Chinese monetary and banking authorities have a habit of ignoring the informal financial sector until serious problems emerge. This approach cannot last forever, and changing it means acknowledging the problems of the formal financial sector and taking remedial action.

An immediate step that the authorities should take, as many economists have argued for years, is to allow the saving rate to reflect the cost of investment. That way, ordinary depositors would put their savings back into banks, because the formal financial sector would offer them a way to tap into the benefits offered by China's phenomenal growth. With more deposits at their disposal and a more flexible interest rate policy, banks would be able to price risks more easily and thus lend more to SMEs.