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China to Promote Solar-Power Consolidation

1(1).jpgBEIJING—China opened the door to consolidation and bankruptcies among its troubled solar-products companies, steps that could help trim overcapacity in a global industry that has suffered losses and liquidations and has sparked a global trade spat.

In a statement late Wednesday, the State Council, China's cabinet, said it would reform the industry, such as by encouraging mergers and acquisitions. The cabinet will reduce government support and ban local governments from supporting failing domestic solar companies, it said.

The State Council also said it would make good use of a "bankruptcy mechanism," suggesting that China would make it easier for companies to declare bankruptcy—a rarity in the solar industry, as well as in China as a whole.

The statement didn't offer details, and it wasn't clear whether Chinese officials would follow it up with specific policies that could lead to shutdowns of Chinese companies and factories. Any such efforts would face considerable opposition from city, county and provincial governments that rely on the companies for tax revenue, employment and economic growth.

Shares of U.S.-listed Chinese solar companies, such as Suntech Power Holdings Co., STP +17.76% Yingli Green Energy Holding Co. YGE +7.08% and LDK Solar Co., LDK +13.49% rallied Wednesday. In 4 p.m. trading on the New York Stock Exchange, Suntech's American depositary shares were up 18% at $1.26; Yingli was up 7.1% at $2.42; and LDK was up 13% at $1.43.

China's support of its solar companies has been central to a global fight over solar subsidies between Beijing, Washington and Europe. In what is potentially its largest trade dispute to date, the European Union has accused China of dumping some of the $21.48 billion in solar panels it exported to the EU last year at unfairly low prices.

China, meanwhile, accuses the U.S. and the EU of offering their own unfair subsidies and last month filed a complaint with the World Trade Organization, citing subsidies in Germany and Italy.

Gross margins for solar panels globally have fallen to less than 10% from more than 30% in 2010, according to investment bank Maxim Group.

Chinese solar companies accumulated heavy debt between 2009 and 2011 to fund their capacity expansion, but a market downturn left them struggling to make interest payments. Support from local banks and local governments have helped carry the weight of the debt.

Unless Chinese solar companies are allowed to fail and reduce capacity, the solar-panel market will remain oversupplied at least into 2014, Shyam Mehta, an analyst at clean-energy market-research firm GTM Research, wrote in a research note earlier this year. "China's support of even uncompetitive companies is badly damaging [Chinese] producers that would otherwise be well-positioned for success," he said.

The State Council acknowledged that main problems in the industry "include overcapacity, excessive dependence on foreign markets and broad operational difficulties," according to the statement.

Other efforts announced by the cabinet include plans to strictly control the expansion of new projects to manufacture polysilicon and solar panels, promote electricity-price reform, encourage the use of independent solar-powered generators and make it easier to supply solar power to China's electricity grid.

Analysts and industry officials have suggested that LDK, which produces solar wafers—a key component in solar panels—is the most vulnerable to a takeover or merger because of its weak balance sheet. LDK and Suntech, two of China's largest solar-products companies, recently received notice that they would be delisted in the U.S. after their share prices fell below $1.

LDK didn't respond to an after-hours email seeking comment.

The debt-ridden solar panel maker said last week that it had hired Citigroup Inc. C -0.03% to assist it in helping it relieve its debt burden. It also has been able to call on a wealth of resources, including investors, lenders and local government officials, to keep it running, according to its filings and local government officials.

Chinese solar companies already are cutting capacity due to falling product margins. In September, Suntech, the world's largest manufacturer of solar panels, said it would temporarily idle one-quarter of its capacity due to pressure from an oversupply of panels, preliminary antidumping tariffs in the U.S. and an EU antidumping probe.

Suntech didn't respond to an after-hours request for comment.

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