So the recent spike in the Shanghai Interbank Offered Rate (Shibor), caused by a refusal to supply liquidity by the People’s Bank of China, should not have come as a complete surprise.

The government has instructed the banks to deleverage, but this will take some months, as interbank assets of RMB10trn (£1.08trn) are huge.

The Bank’s subsequent emergency capital infusion does nothing to change this deleveraging imperative, which will be painful in the short term.

Small and medium enterprises (SMEs) will find it hard to access capital, leading to an increasing likelihood of some sort of ‘event’. Secondary effects will include slower economic growth, both in the form of investment and probably consumption.

The Bank’s injection of liquidity cannot solve China’s problems. Solutions involve profound economic transformation, including growth in private-sector investment, a strengthening of bank balance sheets as credit quality deteriorates, and shrinking of state-owned enterprises (SOEs).

Since 2007, SOEs have been growing assets quickly, in spite of a substantial deterioration in the returns on those assets. This asset growth has been driven by repeated pressure on SOEs to build infrastructure and heavy industry projects.

This strategy is appropriate for short-term stimulus, since the costs of infrastructure investment is usually lower than the damage from a collapse in aggregate demand. The government could have been justified in encouraging SOEs to spend to support growth for a year or two, as long as it re-imposed discipline afterwards.

Instead China has been on a four-year investment binge that is now producing worrying macro indicators. A rising capital-output ratio and a surge in overall debt recall the problems in the West.

With the return on SOE investment falling, so is the incentive for investment. If China wants economic reform, it will have to stop forcing SOEs to make uneconomic investments. This is a draconian choice, as it was the primary tool for stimulus, but to ensure sustainable long-term growth, China must endure lower growth in the short term.

Gary Greenberg is head of emerging markets at Hermes Fund Managers