LDK Solar Debt Repayment a Troubling Escalation of Green Mercantilism

This week, it was reported that struggling Chinese company LDK Solar will have at least part of its debts paid by the city – Xinyu in eastern Jiangxi province – in which it is based. The company is the world’s second largest maker of solar wafers, but has been hit hard by an ongoing solar technology supply glut that is ironically being exacerbated by China. As a result, LDK owed $79.4 million in loan debt to Huarong International Trust Co. at the end of 2011. Yet while Xinyu’s decision to help repay LDK’s loans may be good news for the company, it is very troubling news for opponents of China’s mercantilist policies.

ITIF has taken a close look at China’s mercantilist policies in general and its green mercantilism in particular. The country already “employs nearly all types of mercantilist policies to artificially drive down the price of clean energy technologies,” a previous blog post notes:

In addition to currency manipulation (which provides a 20-40 percent benefit to Chinese products), China utilizes forced technology transfer, significant production subsidies, export dumping subsidies, a near monopoly on rare earth materials, state-owned enterprises, and a host of tax incentives, holidays, and government backed loans to undercut fair-market price or unfairly protect its industries from competition. Instead of investing in the development and innovation of clean technologies, China is spending the lion’s share of its public resources on boosting exports of existing technologies (which then require further subsidies by importing countries to be competitive with fossil fuels).

Xinyu’s debt relief move, however, represents an altogether new mercantilist approach. LDK is undoubtedly in poor shape and needs an infusion of funds to survive. The company has reported losses in four straight quarters and its stock has lost close to 72 percent of its value over the previous 52 weeks. Nevertheless, the Xinyu bailout marks a “more troubling phase” for “the Chinese model of solar capitalism,” as Greentech Solar put it: “It’s the first time a Chinese local government has actively paid off debt for a non-state solar company, according to reports. For the rest of the industry, it’s a grim indication that China’s solar industry may start tapping another source of government support to keep its market-flooding strategy going.” Skeptics might contend that government actions like the U.S. auto industry bailout are little different from LDK Solar’s situation, but 1) government loans in that case were tied to operational and structural reforms, and 2) the companies in question are paying the loans back. While there has been mention of LDK Solar putting up assets as collateral, the repayment of their debt is otherwise essentially free money.

ITIF reports recommend strong action to counter and discourage cases of Chinese green mercantilism like LDK Solar. For example, Enough is Enough: Confronting Chinese Innovation Mercantilismlays out five possible moves, ranging from taking stronger retaliatory trade action under existing authorities to building counterbalancing global free-trade coalitions. Among several recommendations, Green Mercantilism: Threat to the Clean Economyoffers a more “carrot-like” option: allow nations to meet global greenhouse gas reduction obligations by committing to clean energy RD&D investment targets, thus providing an incentive for innovation-based policies in lieu of green mercantilism.

The bottom line is that Chinese policies pose a significant threat to global clean energy innovation. Going forward, the U.S. must work hard to ensure that cases like LDK Solar and the city of Xinyu are the exception and not the norm.