For a director who has just been slapped with a five-year film-making ban, Lou Ye appears remarkably unperturbed as he describes how he was hauled before the Chinese censors last Friday for a dressing-down that made headlines around the world. "I thought there would be some trouble, though not this bad," he says. "When I heard their decision, I couldn't help a bitter smile. It was the same thing that happened to me in the past, the same thing that many directors have experienced. I bet even the official who made the announcement was bored."

Punishment can hardly have been unexpected. Lou has had two previous films banned. His first film Weekend Lover, which was banned for two years and then released, and Suzhou River, which is still prohibited. But he has gone even further in his latest work, Summer Palace, which critics have described as one of the most controversial films to come out of the Chinese mainland in the past 50 years. A contemporary story of love and disillusionment, it follows a female student over 15 years from her home in a north-eastern province to Beijing University - where she meets her soulmate - and out into the wider world. In the process, Lou shatters sexual and political taboos. As well as having several sex scenes, Summer Palace is the first mainland film to show male and female full-frontal nudity.

Perhaps more significantly, he also challenges one of the basic tenets of political correctness in communist China - "don't mention the massacre" - by scripting a plot that pivots around the events of 1989, when People's Liberation Army tanks and troops fired on protesters after a pro-democracy demonstration by students in Tiananmen Square.

If that was not enough to give the censor a coronary, Lou took the film overseas without permission for a premiere at this year's Cannes festival. By Chinese standards, this is not so much pushing the envelope as ripping it to shreds. There was never any doubt that the authorities would be angry. So why did he do it?

"I have been wanting to make a movie like this since 1989. I was a college student in Beijing that year. Many things happened around me. It was a year of great impulsiveness."

He recalls that almost every student in Beijing was involved in the demonstration. Friends were hurt. Students in other universities were killed. It was an experience that he needed a long time to digest.

"The background of the 1980s is very complicated. I thought if I walk some distance, I would be able to see it more clearly. And I wanted to look beyond 1989 to see how the events of that year changed society afterwards."

He feels China, generally, is a better place than it was then. "The political system is more flexible, the economy is growing fast and the relationship between people is more equal."

But there is a great sense of loss, too. "In my story, I tried to show that it is easier to change the outside than the inside. The pain caused in the 80s continued to be felt in the 90s and beyond. The confusion in people's hearts is not given enough attention when we weigh up social change."

Other artists of his generation have expressed similar feelings. For them, 1989 was the most important year of their lives, something that has been the preoccupation of their work ever since.

"It was like falling in love," he says. "And then after 89, people felt like they had lost something, like they had broken up with a lover."

Sitting across the spotlit living-room table where he usually auditions actors, I wonder whether his decision to take the film to Cannes - without approval - was a form of protest. His lawyer's explanation is very different. The state administration for radio, film and television initially withheld approval on technical grounds, but Lou wanted to honour a commercial commitment to the organisers at Cannes and a moral obligation to his crew to give the film a big promotional push.

Lou insists his motives are not political: "I don't understand why the authorities are so sensitive about 1989. They shouldn't worry about it. The facts are out there already. Analysis of those facts still requires a lot of work. But I'm not trying to make a comment. This movie is just a love story set against that background."

Isn't that a little disingenuous, I ask - after all, one character in the film returns to the dormitory from the protest to curse the authorities as "fucking bastards".

"Yes, there is such a scene. But it is factual. This happened," he says. "And I was restrained in the way I expressed it. I'm just a director. I'm not a politician. I don't want to get into boring politics in my films."

Yet Lou's very approach to film-making is bound to put him at odds with the authorities. "Many Chinese directors practice self-censorship because of the tight controls. But I think this is fatal. Directors must be free. So I say to everyone when we are working, 'Let's forget censorship.' That's why there are always so many troubles after the film is complete. But while I am shooting, I am very happy."

He sees mixed signs of improvement in the censorship environment. Thirty years ago, Lou would have been thrown in prison for even planning such a film. Ten years ago, his script would never have been approved (though even now, the outline for Summer Palace only passed because it was vaguely worded and subsequently rewritten on a daily basis). During a thaw three years ago, he recalls how the censors invited underground film-makers to submit proposals for reform. They asked for a new system of film classification, a review of banned movies, and for the censorship process to be made more transparent and eventually abolished.

"It was constructive," he says. "For Chinese directors that was a very happy winter. The authorities promised to make efforts to improve the environment for movie-making. But since then, we have not seen any fundamental improvement. Overall, there has been a slight relaxation. But for me, it has got worse."

Lou says he is willing to make whatever cuts are necessary to have the ban lifted. But the film administration is in no mood to negotiate. I ask whether it was the sex or the politics that he thinks upset them most. "I think the most fundamental reason is that they think movies are a form of politics. If that was their opinion 10 years ago, I could fully understand. But the reality today is not like that. In 2006, films are part of the entertainment industry."

This is one of the faultlines of politically communist, economically capitalist China: internet companies, newspapers, TV companies and film studios are constantly pushing at the boundaries of censorship, but for business rather than ideological reasons. Foreign critics have even accused Lou of commercial opportunism, suggesting that he deliberately ensured Summer Palace would be banned in order to attract interest in lucrative western film markets. He will have none of it. "I feel that western critics don't fully understand this film. They ignore a lot and focus only on Tiananmen and sex. But that is only a part of the story," he says. "What is more important is what is going on inside the characters. This is a journey of the soul of a female Chinese intellectual. Such a trip could only happen here."

None the less, experience suggests that it does a director's career no harm to fall foul of the censors in China. Zhang Yimou, Zhang Yuan, Wang Xiaoshuai and Jiang Wen have all grown in status since their films were banned. Does Lou expect a similar boost?

"I don't need this kind of help," he grimaces. "There is too much unpleasantness involved."

But there is a coincidence of forces pushing artists such as Lou into new territory. Building on their personal experiences of the Tiananmen protests, they now work in an environment of dramatic social change and commercial pressures. The increasingly global nature of the film industry - in which funding, filming and editing are often done in different countries - has weakened the authorities' power and created new incentives to tackle controversial topics. Summer Palace may be banned in China, but 20 prints have already been sold elsewhere in the world. While China's audiences will have to wait to see the film on the big screen, it's highly likely that it will be out on pirate DVD long before.

In the meantime, what will Lou do?

"I will oppose the ban," he says, without hesitation. "My work is to make movies. And I will do so until someone stands in front of my camera and tells me I must stop. It is my fundamental right."

Defying the order, he plans to begin work on a new project with a Hong Kong writer. But isn't he risking worse punishment? "It's possible. But I believe China's economy and political system are far ahead of the management of the film industry. It is stuck 10 years behind, but it must catch up eventually."

After the interview, the photographer asks for a different location and we all move to his bedroom-office. The walls are festooned with Polaroids of cast and crew members, storyboard sketches, a shooting schedule and, just above his bed, a Polish Solidarity banner. It is a reminder of the movement that inspired Chinese students in the 1980s - and a rebuke to those who accuse him of only provoking controversy for self-promotion.