In its annual Form 20-F filing with the U.S. Securities and Exchange Commission (SEC) last Friday, Chinese solar PV maker Yingli Green Energy Holding Co. Ltd. (NYSE: YGE) said, “There is substantial doubt as to our ability to continue as a going concern.” These are not words investors in the company want to hear.

Yingli stock fell to an all-time low of $0.72 on shortly after the opening bell on Tuesday, after closing at $1.49 on Monday. In its filing with the SEC, Yingli noted:

Our ability to continue as a going concern is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional capital, and the success of our future operations, which in turn are subject to various risks discussed herein including, among others, risks relating to economic conditions in our target markets as well as the supply and prices of PV modules in the market, our ability to obtain additional capital or other funding to meet our payment obligations under our debt instruments, our ability to renew our short-term borrowings when they mature, our ability to restructure some of our existing debts if needed, the ability of guarantors of our debt to maintain their financial condition, and our ability to comply with all covenants of our loan agreements or obtain waivers if needed.

That is a long sentence, but it certainly doesn’t tell the whole story. The bigger problem is that the Chinese government’s long-standing policy of turning a blind eye to the massive debts the country’s local governments have run up has now evolved into turning two blind eyes to the debt problems. The official government policy had been for local governments to keep lending and then to swap the high-interest, short-term debt with banks for long-term, low-interest bonds that the banks would then use as collateral with China’s central bank to make more loans.

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The policy was not doing the trick, so last week the People’s Bank of China and the China Banking Regulatory Commission decided to do more. According to the Financial Times:

[The PBOC and the CBRC] told financial institutions to keep lending to local government projects even if borrowers are unable to make principal or interest payments on existing loans….(the regulation)explicitly banned financial institutions from cutting off or delaying funding to any local government projects started before the end of last year and said that any projects that are unable to repay existing loans should have their debt renegotiated and extended.

Yingli may be saved by the latest directive, but the piper will have to be paid someday, by somebody. Other Chinese solar makers are in the about the same position as Yingli, at least regarding the size of their debts. And the government probably cannot and will not be able to save them all. What that probably means is that political contacts are now likely to become more important that performance. The companies with the most influential friends are the likeliest to survive. Whether one of those is Yingli Green Energy remains to be seen.

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