New reports of a government-sponsored rescue package being assembled for for fast-sinking Suntech (NYSE: STP) and other major solar firms highlight everything that's wrong with China's struggling solar sector, most notably exposing the ridiculous levels of state report it receives. At this point the Chinese seem to no longer care about denying the allegations of unfair government support made by their western peers, and instead are focused on simple survival as the industry remains caught in its worst ever downturn created by a massive supply glut. The western allegations have only made the situation worse for the Chinese, as both the US and the European Union have launched probes that are likely to result in punitive tariffs for Chinese-made solar cells imported into those markets.

Suntech, once considered the industry leader and one of its strongest players, is quickly becoming a poster child for everything that's wrong with the industry, pushing the company to the brink of bankruptcy. The company announced during the summer that it was the victim of a massive fraud, which itself was the result of Suntech's own misleading business practices that made its sales look stronger than they really were.

Suntech only discovered the fraud as it was scrambling to raise cash to repay more than 1 billion yuan in debt due by the end of this year, and more than $500 million more in bond repayments that will come due in early 2013. As pressure built from the company's looming cash crunch, its stock that once traded as high as $80 plunged below the critical $1 mark, prompting the New York Stock Exchange to warn of a potential de-listing.

Now Chinese media are reporting that the government of the city of Wuxi, where Suntech is based, has made an emergency $32 million loan to allow the company to keep operating. The report further states that the local government has taken additional measures like granting subsidies and other loans to Suntech and other solar cell makers in the area so that they can stay in business. Other Chinese media reported earlier last week that China Development Bank, a policy lending arm of Beijing, was also preparing to grant more emergency financing to Suntech and 11 other major solar panel makers to ensure their survival.

First of all, I would like to say that this kind of government support for failing key industries certainly isn't limited to China. The US and European governments all engaged in bailouts for major banks and auto makers like General Motors (NYSE: GM) at the height of the global financial crisis in 2008, and it's fairly certain that most of those companies wouldn't have survived without the outside support. But these solar companies, while important to their local economies, don't even come close in size or importance to big global names like Citigroup (NYSE: C) and GM. Furthermore, the current solar crisis is the direct result of a much more market-oriented problem, namely oversupply, and closure and consolidation are urgently needed if the industry is ever going to return to health.

Adding to the problem, these new bailouts may help the Chinese companies to survive for another year or maybe 2, but they will also help to openly show that the western allegations of unfair government support are true, meaning punitive tariffs from the US and Europe won't go away anytime soon. If China is smart, it will use this "emergency funding" opportunity to force consolidation among its oversupplied solar sector, requiring healthy companies to merge and unhealthy ones to sharply reduce their output or close completely. Otherwise, the crisis will continue for at least another year or two, potentially sending a chill over an industry that will be key to the world's future energy security.

Bottom line: China's rescue plan for its bloated solar sector will only prolong the current oversupply crisis for another year or two, dealing a broader setback to the global industry.

This blog was orignally published on Young's China Business Blog and was republished with permission.

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