Cleantech Market Intelligence
China’s ‘Solar Bubble’ a Coal Bubble in Disguise
Tremors rippled through global financial markets this week after Shanghai Chairo Solar Energy Science and Technology defaulted on its corporate debt. The first Chinese company to default on domestically issued bonds, Shanghai Chairo is seen as a signal of the over-inflation of China’s red-hot solar market – and, worse, as an indication that the whole edifice of “shadow banking,” shaky corporate debt, excessive property lending, and unsustainable economic growth in China could come crashing down, leading to another global financial meltdown.
That seems overly alarmist. China’s leaders have for some time been forecasting a modest slowdown in economic growth for 2014, to the 7%-8% range, which would still be the envy of any Western economy. And Chinese premier Li Keqiang warned on Thursday that future corporate debt failures are “unavoidable” as the country deregulates its financial markets and the government stops propping up unprofitable enterprises. China’s economy is maturing beyond export-led growth based on cheap commodities, and some regrettable bankruptcies aside, that’s good not only for the Chinese people, but also, ultimately for the stability of the global financial system.
At least that’s the official, reassuring line. In the energy sector things are slightly more complicated.
There’s no question that the Chinese solar industry finds itself in a situation of overinvestment and overcapacity. The spectacular bankruptcy of Suntech, previously headed by China’s “Solar King,” Zhengrong Shi, signaled clearly that the dot-com phase of China’s solar power boom is officially over and a period of sober reassessment – and disinvestment – must inevitably follow.
Still, overseas solar markets, particularly the United States, are enjoying sustained growth, largely thanks to innovative leasing models. And last month the Chinese government upped its target for new solar installations for 2014 to 14 gigawatts (GW) – a mark that would surpass last year’s total of 12 GW, which itself was the most any nation had added in a single year. China’s solar industry must adjust to market realities going forward; but the market is growing.
That’s not necessarily true of the coal sector, which could be the real bubble now threatening China’s sustained economic growth. Nearly 40GW of new coal-fired power generation capacity was added last year, and it’s no longer obvious that demand will continue to grow to soak up all that power. China has actually closed down more than 80 GW of coal capacity in the last dozen years, and the government reportedly plans to shutter another 20 GW in the coming years.
Indeed, within 5 years there may well be a nationwide cap on coal consumption in China – an extraordinary development in a country whose economic miracle of the last 20 years has been powered almost completely by coal. The less-noticed default of Haixin Steel, a steelmaker based in the coal-producing region of Shanxi Province, China’s Appalachia, could be a more troubling episode than Shanghai Chaori. Haixin was involved in “triangular debt” arrangements with coal producers and other investors, and its failure could forebode turbulence in China’s heavy industry – and its commodities markets, including coal.
“The truth is Chinese coal consumption is peaking,” writes Justin Guay, of the Sierra Club, “and its plans to build the world’s largest coal pipeline is a bubble that may have already burst.”
If the coal/steel nexus that has fueled China’s growth turns into a bubble, concerns over solar companies going belly up will look minor by comparison.