LDK Solar Debt Repayment a Troubling Escalation of Green Mercantilism

Xin Yu City Center

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 Mercantilism lays 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 Economy offers 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.

A view of the Xinyu city center, above. Photo credit: Wikimedia Commons.

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About the author

Clifton Yin is a Clean Energy Policy Analyst at the Information Technology and Innovation Foundation. Prior to joining ITIF, he earned a Master of Public Policy degree with a focus on environmental and regulatory policy from the Georgetown Public Policy Institute. His master’s thesis sought to use statistical analysis to evaluate the effectiveness of California’s Renewable Portfolio Standard on encouraging in-state renewable energy generation. While a graduate student, Clifton served as a policy fellow at Americans for Energy Leadership and interned at the Environmental Defense Fund and the American Enterprise Institute.
  • DaveDouglas

    Let me see if I have this straight:

    Chinese solar startup gets government support.  Company gets in trouble, government pays off debt to large bank.

    American solar startup get government support and DOE loan guarantee.  Company goes bankrupt, government pays off debt to large bank.  

    The first one is green mercantilism and the second isn’t?  

  • Clifton Yin

    Thanks for reading Dave. I think it’s an apples to oranges comparison. The Department of Energy’s loan guarantee program was for companies trying to commercialize advanced technologies, with loans conditional on scaling up and building advanced manufacturing capabilities. The support was specifically aimed at bridging a technological valley of death. Because of the high-risk, high-reward nature of these investments, some failed and taxpayers were on the hook for some of the costs of the loans. But as ITIF has argued, the U.S. should not and can not be scared off by failure: http://www.innovationfiles.org/dispatch-from-the-arpa-e-summit-2012-scared-off-by-failure.

    In contrast, the city of Xinyu is simply buying off debt with no connection to high-risk technologies, tech valleys of death, and next-generation technology development. It’s an almost no strings attached-subsidy that is particularly egregious when considered against the backdrop of the slew of existing Chinese mercantilist policies.

    All that being said, the DOE loan program is certainly ripe for reform and we would be well-served by a vigorous debate on the program’s merits and drawbacks as currently structured.

  • Clifton Yin

    Thanks for reading Dave. Sorry for the late response – I had an issue with the commenting system.

    I think it’s an apples to oranges
    comparison. The Department of Energy’s loan guarantee program was for
    companies trying to commercialize advanced technologies, with loans
    conditional on scaling up and building advanced manufacturing
    capabilities. The support was specifically aimed at bridging a
    technological valley of death. Because of the high-risk, high-reward
    nature of these investments, some failed and taxpayers were on the hook
    for some of the costs of the loans. But as ITIF has argued, the U.S.
    should not and can not be scared off by failure: http://www.innovationfiles.org/dispatch-from-the-arpa-e-summit-2012-scared-off-by-failure.

    In contrast, the city of Xinyu is simply buying off debt with no
    connection to high-risk technologies, tech valleys of death, and
    next-generation technology development. It’s an almost no strings
    attached-subsidy that is particularly egregious when considered against
    the backdrop of the slew of existing Chinese mercantilist policies.

    All that being said, the DOE loan program is certainly ripe for
    reform and we would be well-served by a vigorous debate on the program’s
    merits and drawbacks as currently structured.