China puts the brakes on new solar production capacity

Doug Young

Bottom line: New signals indicate Beijing plans to move aggressively to prevent solar panel makers from adding unneeded new capacity to help their local governments meet economic growth targets.

A new low-key announcement from Beijing is hinting at a quiet struggle taking place behind the scenes in China’s promising but embattled solar panel sector, with the regulator saying it will stop the building of most new manufacturing capacity.

On one side of this struggle are local government officials, who may be encouraging solar panel makers in their areas to add capacity that will benefit their local economy but is the last thing the industry needs. On the other side of the battle is Beijing, which is trying to show the world it doesn’t unfairly subsidize its solar panel sector as it also tries to rationalize a bloated domestic industry that is stifling global development.

We’ll return to the bigger picture shortly, but first let’s focus on the latest industry development that comes in a low-key announcement from the Ministry of Industry and Information Technology (MIIT), which oversees the solar panel sector. The announcement on the MIIT’s website is quite brief (announcement), but media are saying the move will effectively forbid most panel makers from adding new capacity to their production lines. (English article; Chinese article)

The broader idea seems to be that Beijing wants solar panel makers to boost the efficiency of their current operations by focusing on quality over quantity. The government will demand that producers spend more money to upgrade production lines, and that they spend more money each year on new product development.

The reality is that most of China’s solar panel makers are quite cash poor, following a prolonged sector downturn that has only begun to ease over the last year. But in a country like China, being cash-poor doesn’t necessarily prevent companies from building new capacity that they individually can’t afford and that the bloated sector hardly needs.

That’s because local governments often have access to resources that can assist in the building of new capacity even when it isn’t necessary. Such resources include easy access to cheap financing from state-run banks, government-owned land that can be used for new factories, and control over local tax policies that can help manufacturers lower costs.

So why would these government officials want to promote development of unnecessary new capacity that’s likely to lose money? The reason is simple. Local governments in China get annual economic growth targets from Beijing, and are punished if they fail to meet those targets. Expanding their local solar panel output is one way to help them meet their targets, since the panels are a relatively mature product with a well-established market. Thus as China’s broader economy shows signs of a major slowdown, these local governments could easily use their resources to push local solar factories to boost production to help them meet their growth targets.

Worried about that possibility, Beijing appears to be taking preemptive action to halt a building wave of new capacity that will only further stifle development of the global industry. We’re already seeing recent signs that the sector could be slipping back into a rut, as 2 of China’s larger firms, Yingli (NYSE: YGE) and ReneSola (NYSE: SOL), slipped back into the loss column in their latest quarterly reports. (previous post)

All that said, the bigger question is whether Beijing will succeed in this potential struggle with local governments, and prevail in preventing manufacturers from boosting capacity. This message from the MIIT appears to show that it will be watching all of the country’s solar panel makers very closely, and will aggressively move to shut down any expansion plans that it detects. That should be good news for the global sector, and ultimately prevent a new downturn just as manufacturers start to recover from the last one.

Doug Young has lived and worked in China for 16 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

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