China’s solar industry had to pay higher interest rates for bank loans than U.S. and European competitors, and paid market rates for loans. With the appreciation of the yuan, “the loan rate we are paying is probably equivalent to over 10 percent,”Ok - lets see what the interest rate the market (as opposed to the Chinese banks are charging the solar makers):
(Unfortunately you need to click this image to see the axis)...
Suntech is at 78 percent. LDK is 53 percent. Trina is "only" at 22 percent - but the Trina debt piece is a convertible and was recently trading way above par as this bond price chart shows:
(Click the image to see the axis.)
Which shows the price of the Trina piece coming down from well over 100 as the "convertible" bit lost its value.
Trina has recently expanded its loans by several hundred million dollars at low rates. But Jifan Gao says those rates are not subsidized. He is wrong and the solar makers should and will lose their case. There is a robust market telling us what the "free market rate" is and it does not look like the subsidized rate the Chinese banks are providing.
The Solyandra case
The Chinese solar makers will - with righteous indignation - point at the subsidized loan that the US Government gave Solyandra - a loan that has now gone solidly into default. They have a point - but not a good one in a court. Their problem is that the WTO agreements have a specific exemption for government loans to develop new industries and new products. The most famous recipient of these loans is (of course) Airbus who gets subsidized loans to develop every new plane. Boeing can't win that trade case because the subsidy - like the Solyandra subsidy - is international trade law compliant. (If you want a decent history of that subsidy read John Newhouse's excellent book on Boeing versus Airbus.)
The reality for solar makers
The reality for the solar makers is bleak - maybe not for the solar business - but certainly for the shareholders and debt holders in the companies. The American solar makers will win the trade case. There will be a countervailing tariff. Europe will almost certainly follow. The products will have no markets at tariff included prices and the subsidized loans that the Chinese banks gave the solar companies will not be repaid.
The banks will wind up owning the companies anyway, selling products facing crippling countervailing tariffs. When the most potent argument that the Chinese solar CEOs can come up with is that their interest rates are high (almost 10 percent) but are really 30-60 percent below market their position is clearly weak.
There is an alternative. The alternative is for the Chinese to simply agree to provide no more subsidized loans and to roll all funding as it matures into long-dated non-subsidized loans. Then the whole countervailing tariff argument just evaporates.
Of course the solar companies - every single one of them - goes bust. And quite rapidly.
But it doesn't matter - after bankruptcy the Chinese government - through their banks - owns them. They become state owned enterprises and the Chinese Government can amalgamate them as they see fit. Indeed as SOEs they can seemingly subsidize them as they see fit too - because those subsidies are much harder to argue against in a trade case.
The losers are of course shareholders and western debt holders of the Chinese solar stocks. But I see no reason why should the Chinese government should give subsidies and enter into a crippling trade dispute to protect them.
It is time for Jifan Gao and the other CEOs to have their subsidies - and their businesses - removed from them just as the CEO of Solyandra had his business removed from him. The Chinese banks will learn - as people have been learning since the advent of capitalism - that when you lend a business too much you either own it or are going to spend a lot of time collecting.
PS. I do not wish to enter into the morality of the trade dispute. For instance I don't wish to argue that the loans to Solyandra were moral and the loans to the Chinese companies were immoral. I just want to argue what is - and why it is from an investment perspective. The loans to Solyandra were legal. The loans to the Chinese makers are not legal. Morality does not enter into it.
Moreover a countervailing tariff will hurt some people in the US (eg residential solar installers). That is a fact - but it won't enter into the legality of the dispute.