A new report in today's China Daily is providing the clearest indication yet that Beijing is delivering some tough medicine to many of the nation's smaller solar panel and polysilicon makers by letting them go backrupt to return the struggling sector to health. Up until now, much of the talk in China has focused on rescuing the money-bleeding sector through a comprehensive bailout plan designed to create about a dozen major players as the industry's backbone. But little has been said about the bankruptcies and closures that also need to accompany such a clean-up, in a country where state support due to local factors often allows companies to keep running even after they become hopelessly mired in the loss column.

The China Daily article, which isn't available online, starts off with the usual rosy headline "Solar industry to get jolt from new policies", and leads with discussion of a program that will allow more solar energy producers connect to then national electricity grid. But the discussion quickly turns a bit more pragmatic after that, saying the government will limit new projects to make both solar panels and polysilicon, the main ingredient used to make panels.

It's not until near the end of the article that we learn that more than 80 percent of China's top 43 polysilicon companies have stopped production due to the global supply glut. And it's not until the very end that an industry official is quoted saying that the government is working hard to help the industry, but that "the companies still need to rely on themselves and adjust their plans to the new changes."

Those words come from Meng Xiangan, deputy director of the China Renewable Energy Society, who was speaking at a meeting of the State Council led by outgoing Premier Wen Jiaobao himself. The presence of such influential people and the high level of the meeting means the discussion most likely reflects Beijing's increasingly pragmatic stance as it crafts a bailout for this once promising sector that has fallen on difficult times.

Anyone who watches the industry has known all along that mass closures of smaller, less efficient manufacturers in China are a critical element to putting the solar sector back on a sustainable path that includes earning profits. But in China the words "bankruptcy" and "closure" are still largely taboo, especially as the nation's economy slows and government officials are loathe to see unemployment rise. The necessary layoffs are even more unappealing because solar has been designated by Beijing as a key focus industry, meaning regional officials won't want to see the closure of manufacturers that are the pride of their local economies.

China's top 150 solar cell makers alone can produce panels with 40 gigawatts worth of capacity each year, even though global demand for panels is only expected to range between 20-40 gigawatts annually for the next 2 years, according to the report. All of this points to the sobering fact that officials in Beijing are finally realizing that closures, while painful, are a necessary step to bringing the country's solar industry back to health.

That message is probably already being sent out to local governments, which are being told to allow many smaller producers in their areas to quickly close shop and not intervene with financial assistance. Look for these closures to quietly continue for the smallest, least efficient players. Meantime, many mid-sized producers will most likely be combined with some of the largest players after Beijing announces a broader sector rescue plan most likely in the first half of next year.

Bottom line: Beijing is finally taking the necessary step of letting many of its smaller solar manufacturers close as it part of a broader sector rescue plan.

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

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