China Doubles Down on Green Mercantilism, Purchases LDK Solar

LDK Solar, the world’s second-largest solar wafer maker, is now a Chinese state-owned enterprise. ITIF previously noted that the company had $80 million in debt paid back by Xinyu, a city in the eastern Jiangxi province which is also home to LDK’s main headquarters. But LDK Solar reached a new milestone last week with the news that it is selling a 20 percent stake in the company to the state-run Hen Rui Xin Energy for roughly $23 million. While the United States has raised tariffs on Chinese solar imports this year in an effort to discourage the country’s green mercantilism, the LDK Solar move suggests that China is doubling down on such policies.

The Xinyu-debt repayment and Hen Rui Xin Energy-equity acquisition are two recent instances in a string of notable government actions to shore up the struggling LDK Solar. Two months before the Xinyu announcement, MorningWhistle reported that the Jiangxi provincial government “pressur[ed] state-owned banks into approving a loan package worth 2 billion yuan” (more than $320 million USD) for the company, interest rate unknown. And just three days after the announcement of the Hen Rui Xin Energy news, local Chinese news reported that LDK is set to receive $700 million yuan (~$112 million USD) from the provincial government itself.

“Any U.S.- or EU-based firm with financials similar to LDK would long since be bankrupt,” Eric Wesoff at GreenTech Media opines in response to the Hen Rui Xin Energy move. (ITIF has pointed out that the company has reported losses in four straight quarters and its stock had lost close to 72 percent of its value over the previous 52 weeks as of July 2012.) Wesoff thus raises a couple rhetorical questions in light of the continued effort by Chinese governmental entities to help the company: “If China rescues a strategically important industrial firm and employer — is that an unfair trade practice? Or is that a sovereign state’s right to influence industrial policy, akin to a bank bailout or an automotive bailout?”

The answer is definitively the former – China’s actions thus far to boost LDK Solar have constituted an unfair trade practice. As I’ve written before:

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.

In the case of LDK Solar, no protection of taxpayer investment is considered and instead the goal for China is to continue propping up its uncompetitive solar industry.

Ultimately, LDK Solar’s transformation into a state-owned enterprise is further evidence of the first lesson of China’s clean energy policy: "Green mercantilism is not a long-term sustainable clean energy strategy…any clean energy industry – China’s included – cannot be solely based on exporting today’s uncompetitive first and second generation technologies at greater and greater amounts. There are limits to the amount of subsidies government can provide.” The Chinese government might have bought LDK Solar another reprieve, but short of a much-needed shift in focus to innovation, China’s solar industry woes will only continue.