Is China's Solar Industry Following the Ethanol Path? (YGE, SOLF)

The government of China’s announcement that it would subsidize solar projects that exceed 50 kilowatts gave China’s solar industry a big boost. Still,the more that government piles into the solar sector, the more the sector begins to look like the ethanol industry in the US.  Yingli Green Energy Holding Company Limited (NYSE:YGE) this morning announced that one of its affiliates has struck a deal with a branch of the Bank of China that could lead to a total credit line of about $880 million (6 billion RMB).

When Solarfun Power Holdings Co., Ltd. (NASDAQ:SOLF) announced its miserable results earlier this week, it noted the commercial credit lines from China’s banks remains “accomodative.” Now we know what the company meant.

The People’s Republic wil prop up the country’s solar industry because it is one area where jobs can be saved to help boost the domestic economy. The subsidies could also boost other areas of the economy when the solar panels are installed. Best of all, the subsidized solar sector maintains China’s position as a leading exporter of solar panels.

Chinese energy companies, whether in the oil business or the solar business, are often called upon to contribute to the public welfare by taking one for the team. Just a couple of years ago, Chinese oil refiners were forced to lose money on every gallon of gasoline they produced because the government did not want to raise pump prices. The government rewarded the companies with tidy injections of cash to keep the income statements looking sharp.

Much the same thing is going to happen with China’s solar industry. China sees an opportunity here to keep employment from falling, to increase domestic demand for solar panels, and to maintain its export position. That’s worth a lot to the government of China, in much the same way that ethanol production was worth a lot to US politicians.

Paul Ausick
March 27, 2009