Shining a light on Too Big to Fail in China

BEIJING (Caixin Online) — Since Jiangxi LDK Solar Hi-Tech Co. Ltd. settled in Xinyu, in southeastern China’s Jiangxi Province, the local government has gone out of its way to give it preferential treatment, making the company a focus of the local economy.

However, the manufacturer of solar modules, along with other similar Chinese firms, has encountered difficult times of late. In the past few years, these companies have built up large inventories even as demand has fallen off and profits all but disappeared. Naturally, LDK Solar ran up large debts.

All of this left the government with a choice: let the company fend for itself, or intervene, doubling down on its support. In fact, this wasn’t much of a choice, as the government has reflexively lent even more support to the troubled company, bringing into full view the relationship between government and business in China.

Governments at the city and provincial levels have taken steps to protect LDK Solar’s creditors and prevent the firm from filing bankruptcy. At the same time, the government has tried to find a white knight to buy the company, which employs thousands in Xinyu.

The situation in China’s solar industry and especially at LDK Solar shows the degree to which government becomes involved, for better or worse, in the market in China and how some companies become too big to fail.

The Jiangxi government gathered bank officials for a meeting in May. A bank source said the government vowed to allocate 2 billion yuan ($314 million) from its budget to ensure LDK Solar would not fail.

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On July 12, the Xinyu city congress said it approved a proposal to incorporate 500 million yuan

 worth of loans LDK Solar borrowed from Huarong International Trust Co. into its annual budget. Xinyu also sent officials to LDK Solar to get involved in daily operations, and the officials have remained there.

Meanwhile, the government of Hefei, in eastern China’s Anhui Province, where LDK Solar has a production facility, has started to mull bailout measures, a bank source in Jiangxi said.

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This is not the first time the government has had to help the company. At the end of 2009, LDK Solar sold stakes in a subsidiary to a provincial government company for 1.5 billion yuan. This was intended to relieve a cash crunch brought on by the global financial crisis.

Ties that bind

The local government in Xinyu has played an important role in LDK Solar since its arrival in 2005. Its first move was to raise 200 million yuan for the company. City officials also approved paperwork and provided benefits involving land and electricity prices.

Early on, Wang Dehe, former Xinyu party secretary, showed his excitement for the project, saying: “If we have a large company of this kind, it can enhance our city’s reputation and people’s awareness of it. In the future, if we can develop our city into a silicon town, solar companies can also make contributions to our local public finance.”

In 2006, Xinyu introduced guidelines for developing the solar industry. It wanted local solar firms to have annual sales revenue of 50 billion yuan by 2010. The sector was seen as a pillar of the local economy.

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Initially, Xinyu got the success it wanted. In 2011, LDK Solar paid 1 billion yuan in taxes to the city government, making it the largest taxpayer.

However, the success was short-lived. In the first six months of 2012, Xinyu had tax revenue of 46.08 million yuan from local solar companies, down 94.29% from the same period in 2011, the city’s statistics bureau says.

LDK Solar performance was correspondingly poor. Its sales revenue was 1.65 billion yuan in the first half of this year, down 75.8% from the same period the previous year.

In May, LDK Solar said it had laid off 5,554 employees this year, a source close to the company said. However, a bank source said the figure is almost 10,000 so far. Suppliers have also been left in the lurch. The company has defaulted on payments totaling at least 600 million yuan to 20 suppliers for raw materials and equipment, Caixin reported in late July.

Cautious banks

LDK Solar’s first quarter report says it had 29.3 billion yuan in gross liabilities. The company has borrowed between 14 billion and 15 billion yuan from domestic banks, a source at a creditor bank said. Naturally, banks started paying close attention to LKD Solar’s financial health.

The country’s policy bank, China Development Bank (CDB), has led talks regarding repayment between the company’s creditors and the local government. A bank source says CDB and China Merchants Bank have loaned more than 3 billion yuan each to LDK Solar. Another lender, the Bank of Beijing, is luckier because LDK Solar has already repaid the principal on its loans.

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The reason that banks were so generous about lending, a source who worked at a bank in Jiangxi says, was because of the local government’s strong support. One interpretation of this is that banks knew that if the company were to fall on hard times, the government could be counted on to make sure the loans were repaid.

LDK Solar has approached China Energy Conservation and Environmental Protection Group (CECEP) as a potential buyer, bank sources say. State-owned CECEP, which focuses on energy conservation, emissions reduction and environmental protection, indeed talked to the troubled company, but no agreement was reached, a source close to LDK Solar said.

The provincial government also asked the local companies to take over LDK Solar, but Jiangxi Copper Corp.
(600362) another large provincial state-owned giant, has shown no interest, a bank source said.

Pan Qifang, secretary of Jiangxi Copper’s board of directors, summed up the general wariness of his company to get involved by saying: “Our company is not familiar with the solar industry, so we cannot rush into it.”

A resolution to the problem facing the governments of Xinyu and Jiangxi doesn’t appear to be imminent. Considering LDK Solar’s situation, companies were simply unwilling to get involved now, the CDB source said.

“The simplest way is for banks give it more time,” he said.

Read this report on Caixin Online.

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