**The Rollercoaster of China's Wind and Solar Power Industries**
The Chinese wind power and photovoltaic (PV) industries have experienced a dramatic rise and fall in just four years, moving from the peak to the bottom of the valley. Unlike the overcapacity seen in developed countries like those in Europe and America, which is often linked to technological and economic cycles, China’s overcapacity has its own unique set of causes.
In China, industrial support policies issued by the State Council or central ministries play a major role. Local governments are key players in this process, pushing enterprises to settle down and offering preferential measures such as bank credit and guaranteed sales channels. To capture local markets, companies tend to build factories extensively, driven by the belief that “bigger is better†when it comes to securing government and bank support. This has led to an explosive expansion of production capacity.
When market demand is unclear, China’s overcapacity often emerges from the supply side. Simply expanding demand may be costly and ineffective in saving struggling firms. In the case of wind and solar power, resolving overcapacity must start with addressing the supply side.
**China's Current Overcapacity Crisis**
“China’s current overcapacity is not just a result of a single economic cycle,†experts say. In 2013, no PV manufacturing company was profitable. Research from the Ministry of Science and Technology in Qinghai showed that some new entrants were forced to halt production due to being too late to start. Even strong companies were selling at a loss, barely keeping cash flow going.
Wind power equipment manufacturers faced similar challenges. After more than a year of large-scale shutdowns, companies like Huarui Wind Power shut down eight overseas subsidiaries within six months. Some production lines at Goldwind Technology were idle, with only a few days of output per month. Foreign companies also began withdrawing from the Chinese market.
According to the *China Wind Power Development Report 2012*, China’s wind power equipment manufacturing capacity reached over 30 GW in 2012, but the installed capacity was only 18 GW. With limited access to foreign markets, 40% of domestic equipment remained idle. By mid-2013, the idle rate exceeded 60%.
In the PV sector, China’s module production capacity hit 45 GW in 2012, while global production was only 38.4 GW. Even if all components were sold, China’s production still exceeded global demand by nearly 7 GW.
Chen Letian, a macroeconomic researcher at Nisshin Securities, pointed out that China’s overall capacity utilization rate is 57.8%, significantly lower than the 72–74% range considered normal. He emphasized that China’s overcapacity issue is severe.
Shen Jianguang of the Financial Times noted that China’s overcapacity isn’t just a cyclical problem. It stems from a different logic: guided by central policies, local governments offer incentives, and companies either voluntarily or under pressure expand their capacity.
**The "Resource for Industry" Temptation**
Local governments play a crucial role in encouraging businesses to expand into new sectors. For example, Zhenbei Cashmere, originally in the textile industry, was lobbied by local officials to enter the PV module business. In 2009, Zhejiang Besun Photovoltaic was established, signaling the trend of companies shifting into new energy sectors.
Many companies entered the PV industry without prior expertise, hoping to make quick profits. One executive from the Beijing Certification Center said, “Leasing a factory and buying a production line can get you started. If the market is good, you can recover your costs in one year.†However, most of China’s low-end production is already oversupplied.
Local governments are motivated by GDP growth, tax revenue, and employment. Companies that don’t operate locally struggle to sell their products. In Jiangsu, for instance, wind turbine manufacturers like Huarui Wind Power and Goldwind Technology had to invest in Yancheng or Dafeng City to gain local favor.
This local protectionism disrupted the strategic plans of companies like Sinovel. Despite investing billions, many projects were delayed or abandoned due to market fluctuations. Similar patterns emerged across the country, with over 100 cities launching new energy industrial parks after 2008.
Senior wind power expert Yang Xiaosheng criticized the blind expansion caused by local protectionism, stating that it leads to unfair competition and distorted markets.
**The Hidden Dangers of "Expanding Demand"**
As renewable energy installations grow, subsidies have become stretched. Banks, influenced by national policies and local governments, have been inclined to extend credit. A wind power equipment manufacturer noted, “If a company can't repay loans, the bank will find ways to help.â€
This pattern is not unique to the new energy sector. Shipbuilding, flat glass, steel, and cement industries have also expanded rapidly, supported by easy credit. A CFO of a wind power giant stated, “The more money you borrow, the less likely banks and governments will let you fail.â€
Some wind power companies owe billions in debt, yet they continue to receive loan extensions with minimal conditions. A bank official reportedly said, “At least in my office, we won’t let the company go bankrupt.â€
This combination of local governments, banks, and companies has created a uniquely Chinese form of overcapacity. While expanding demand is often proposed as a solution, it hasn’t worked well. Even in the “Three North†regions, which have the best wind resources, wind farms often operate at a loss due to curtailment.
Although southern regions have seen some improvement, high land costs and limited scale keep construction costs high. Only a few companies, like Longyuan Power, manage to break even.
For wind power equipment manufacturers, falling prices—from 6,000 yuan/kW in 2007 to 3,000 yuan/kW today—have left many struggling. Meanwhile, renewable energy subsidies are running short. Huadian Fuxin Energy owes over 900 million yuan, and Guodian Group has receivables of nearly 10 billion yuan. Total arrears now exceed 23 billion yuan.
Even without subsidy issues, simply expanding demand may not solve the problem. China’s PV and wind power production capacities already exceed global demand.
To address this, Chen Letian suggests starting from the supply side. Industrial transfer to developing countries like Vietnam and Africa could help. Setting stricter environmental and energy standards would eliminate outdated capacity. Mergers and acquisitions could improve the overall quality of production.
In conclusion, China’s overcapacity is a complex issue requiring structural reforms rather than temporary fixes. The path forward lies in reducing excess supply and improving efficiency.
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