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On the Brink? China’s Solar Industry Debt Drama

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Pacific Money

On the Brink? China’s Solar Industry Debt Drama

Suntech, Chaori and LDK Solar— are all struggling to meet their debt obligations. Is a default coming?

Pacific Money has previously analyzed the difficulties facing China’s solar sector.

It was noted at the time that the solar sector is emblematic of many of China’s wider economic imbalances, including: overinvestment, dependence on foreign demand (trade surplus), tensions with trading partners as a result of China’s subsides, and Beijing propping up otherwise moribund companies. 

The solar sector in China is barely treading water as companies struggle with debt repayments amid sharply declining prices and a 20 percent drop in global demand for solar panels last year.

As it stands now, China’s solar industry is narrowly avoiding becoming a model for another interesting area of China’s economic peculiarities: the possible first domestic bond market default since the People’s Bank of China began regulating the majority of the market in the late 1990s. 

At first glance some may feel that the lack of any bond market default since China’s accession to the World Trade Organization (WTO) would be a positive sign, perhaps indicating a lack of risk taking by debt issuers, or an efficient and effective regulatory system. It would, on first glance, seem that China’s bond market offers a safe investment channel.

In fact, the lack of a single bond market default so far is actually a serious weakness for China’s financial system.  Current or prospective market participants have no experience as to how a default would be handed; in other words no precedent against which to measure the risks associated with investing. 

There must be a default one day, so this lack of clarity adds a large “unknown” into any risk measurement equation – reflecting an immature bond market, not a safe one.  The recent trend of local government financing platforms issuing “enterprise bonds” to try and extend maturities on perhaps overwhelming debt burdens has added an extra layer of importance to the functioning of the mainland bond markets. As the bond market grows, clear procedures for defaults need to be established.

Furthermore, the lack of a default so far does not mean that one shouldn’t have occurred. In fact, there have been several instances of companies nearing default only to be bailed out last minute by local governments eager to forestall the unemployment and asset disposal that bankruptcy would create.   

China’s solar industry might soon provide our first modern case study of a company defaulting in China’s bond market, however. Three large solar companies in China—Suntech, Chaori and LDK Solar— are all struggling to meet their debt obligations.

One of the first signs of this was a press statement that Chaori Solar Energy Science & Technology Co.  released last month, which warned that it might not be able to make a bond interest payment that was due on March 7th. The press statement further warned that its losses for 2012 may have topped RMB1 billion (U.S. $176 million), a predicament that evidently had caused enough liquidity problems to prompt the release of the statement in the first place.  After failing to repay some of its bank loans and creditors, however, Chaori was miraculously bailed out on March 3rd by China Securities Depository & Clearing. Still, its RMB1 billion bond is due by 2017.

Suntech may not prove so lucky in covering the U.S. $541 million of debt repayment that was due on March 15th. The company announced last week that it has convinced 60 percent of the bondholders holding notes due on March 15th to give the company a two month reprieve on the payments. Still, this has resulted in a Partial default on March 16th, opening the way for the other 40 percent of bondholders to begin litigation against the company in U.S. courts. 

Suntech has been appealing to the local Wuxi government for assistance to help make this payment.  The central government in Beijing, however, is rumored to be seeking to consolidate China’s solar industry, In fact, Li Junfeng, director of the climate-change strategic research division at the government’s National Development and Reform Commission, told reporters that “the government won’t intervene and shouldn’t.” All this bodes poorly for Suntech as the central government bank’s intervention is probably necessary if the company wants to do more than delay the inevitable.  

The desperate attempts by China’s solar companies to get a lease on life continue, but Suntech’s bondholders may soon endure heavy losses.  It should be an interesting couple of months in China’s gloomy solar industry, and it will be interesting to watch whether the government’s new leadership ultimately acts to save Suntech or whether we witness China’s first default in recent years.