A worker on an assembly line that makes photovoltaic cells, the main energy-generating component of a solar panel, at a Suntech Power Holdings Co factory in Wuxi. To curb industrial overcapacity in some sectors, the Chinese government will take steps to slow production of polysilicon, a material used in making solar panels and wind power equipment. [Agencies]
China is attempting to rein in overcapacity in the country's solar energy sector despite the government's ambitious goal to increase solar capacity from 50 megawatts in 2008 to between 10 and 20 gigawatts by 2020.
Enterprises flocking to boost markets in industries such as steel and cement have been common in recent years, with the government then stepping in to correct potential overcapacity.
The central government last week announced plans to curb the expansion of six industry sectors by withholding approval for new investments and tightening financing.
Surprisingly, considering its role in the fast-growing renewable energy sector, polysilicon, which is used to make solar panels and wind power equipment, was included in the industry sectors targeted by the government.
China will order commercial banks not to finance projects in the targeted sectors, the National Development and Reform Commission (NDRC), along with 10 ministries, said in a statement.
The China Securities Regulatory Commission, the country's capital markets watchdog, also will review applications from the country's solar energy firms for fundraising activities such as issuing additional shares and private share placement. According to local media reports, the commission is likely to reject such proposals.
The move was triggered by fears of overcapacity in the sector. A government document showed that China's polysilicon production capacity is 20,000 tons a year, with an output of about 4,000 tons in 2008.
Projects designed for an annual production capacity of 80,000 tons are under construction.
In 2008, solar cell production in China accounted for 40 percent of the global output. Seven of the world's top 15 solar cell manufacturers are Chinese companies.
Chen Bin, chief director of the NDRC's industry coordination department, said another reason polysilicon was targeted is because of the high energy costs involved in production of the wafers.
Electricity expenses account for 35 to 40 percent of the total cost to produce polysilicon, he said.
"Currently, the domestic solar energy sector has not yet started up extensively, but 98 percent of the solar cells, which use domestically produced polysilicon, are exported - equivalent to exporting large stores of energy indirectly," Chen said.
Apart from driving down prices and profits, overcapacity also tempts Chinese manufacturers to sell their excess output overseas.
As a result, trade tensions are high with the European Union over Chinese exports of steel and tires and also possibly over Chinese solar energy products, according to reports.
Some US and European solar firms reported suffering declines in demand because Chinese competitors wanting to expand their market share in Western countries had forced down their prices for polysilicon.
The chief executive of German manufacturer Conergy AG claimed that Chinese prices are close to what other countries consider "dumping".
This month's guidelines followed overcapacity instructions issued last month by the State Council.
The government's actions also point to concerns that too much of China's 4 trillion yuan economic stimulus package is finding its way into industrial sectors, rather than infrastructure, affordable housing, rural development and technology upgrades.
Visiting the high technology zone in China's eastern city of Wuxi near Shanghai, guests are impressed by the massive 6,900-sq-m solar energy panel outside the new headquarters of Suntech Power.
The facility's one-megawatt solar facade is the world's largest grid-connected, building-integrated solar system, according to Suntech, the world's largest solar module manufacturer.
Suntech has benefited from the Chinese government's subsidies for solar photovoltaic rooftop installations and construction of solar energy plants - known as the "Golden Sun" program.
Suntech reported $321 million in revenues for the second quarter this year, up from $315.7 million in the first quarter, according to the company's second-quarter statement.
Suntech, listed on the New York Stock Exchange, also helped Shi Zhengrong, its founder, chairman and CEO, to become one of the country's wealthiest people.
His picture was on the cover of the US newsmagazine Time just six years after the photovoltaic and renewable energy expert graduated from the University of New South Wales and began his new career in the country of his birth.
The Suntech story has encouraged more companies to join the solar power energy field, including Sunvim, a Zhejiang-based textile maker known for one of the country's popular towel brands.
The government has put in place two significant subsidies for solar photovoltaic installations.
Through the "Golden Sun" program, the National Energy Administration and ministries of Finance, Science and Technology are offering to subsidize half of the construction and connection costs of on-grid solar power plants and 70 percent of the cost of off-grid installations from now until 2011. The program's goal is to produce 500 megawatts of solar power.
An earlier plan established subsidies for rooftop demonstration projects. In addition, many local governments have solar subsidy programs of their own.
Not surprisingly, these initiatives have spurred more companies to enter the solar sector.
According to domestic media reports, more than 50 solar companies from 20 provinces - including Sichuan, Hunan, Jiangsu and Zhejiang - are constructing or expanding polysilicon production lines. The overall construction capacity has reached a potential 100,000 tons.
Zhejiang Yuhui Solar Energy Chairman Li Xianshou expressed his concerns about the oversupply situation.
"There was huge production capacity last year, but how much is qualified? Many enterprises will face the possibility of being push out," Li said.
Still, the first half of 2008 was a profitable time for many polysilicon producers.
"During that time, the polysilicon supply fell short of demand, and sometimes buyers couldn't get orders even if they delivered full payments first," said a sales manager at a polysilicon company based in Zhejiang.
The sales manager said his company's supplies would empty overnight during busy times.
In Zhejiang, the traditional textile manufacturing hub of Jiaxing, is turning itself into a polysilicon manufacturing hub.
"It requires 100 million yuan for a startup in the solar photovoltaic industry," said Shen Fuxin, general secretary of the Zhejiang Solar Energy Industry Association.
"But many companies were still scrambling to come on board, as the industry's average profit return could reach 20 percent or 30 percent," Shen said.
However, the solar manufacturing industry has been hit hard since the end of last year due to a freeze in credit resulting from the global financial crisis, as well as an oversupply of solar panels that have sharply reduced prices.
The government's new guidelines to curb the solar industry's oversupply might push newcomers or small players out of the market, but apparently won't affect the major players, sources said.
Yingli Energy Group, one of China's leading solar cell manufacturers, is reporting increased sales this year.
"We saw shipments increase quickly since the middle of this year," said a sales manager from Yingli who declined to be named.
He said the government's crackdown on oversupply will negatively affect small companies, but added that large companies will continue to win market share because of brand reputation.
Agencies contributed to the story