Struggling solar companies
Take the nation’s solar companies, for instance, which have racked up alarming amounts of debt since 2009. At Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE), the third-largest solar-panel manufacturer in the world, outstanding short-term debt nearly tripled from 2009 to 2011, while profits have collapsed.
Unlike their peers in the U.S. and Germany, Chinese solar companies receive strong support from domestic banks and local governments, many of which depend on them to generate tax revenues, employment, and growth.
But as conditions in the global solar industry have deteriorated, prospects of timely repayment look increasingly doubtful. After years of extending lifeline after lifeline to these struggling companies, it looks like some Chinese lenders have had enough.
For instance, LDK Solar Co., Ltd (ADR) (NYSE:LDK)‘s creditors are currently “in talks” with the company’s host local government over debt payback. The solar company’s local government — the Xinyu government, in central China’s Jiangxi Province — has been urging various companies to take LDK Solar Co., Ltd (ADR) (NYSE:LDK) off its hands, but there has so far been little interest, according to a source with knowledge of the matter, says CaixinOnline.
And then there’s Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP). After it missed a payment on $541 million of convertible bonds on March 15, its creditors sued the struggling solar-panel maker three days later. The firm was subsequently declared bankrupt and is currently undergoing debt restructuring.
Final thoughts
The trials and tribulations of China’s solar industry are just the tip of the iceberg. They merely highlight the unhealthy addiction to debt financing that China’s corporations have developed in recent years. Last year, total debt among China’s corporations surged to 122% of GDP, the highest level in 15 years, according to GK Dragonomics, a China-focused research firm.
Another important facet of China’s corporate indebtedness is that many debt-laden companies are government-owned, as are the banks that lend to them. In fact, one of the most fascinating aspects of China’s unique system of state-led capitalism is that the nation’s four major commercial banks are state-owned.
This has allowed China’s government to unleash tidal waves of credit to counter economic slowdown. But the downside is that, if those loans go bad, as I suspect many likely will, the Chinese government may end up having to foot the bill. Whether or not it finds itself able and willing to do so remains to be seen.
The article Why China’s Debt Is a Problem originally appeared on Fool.com and is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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