Bribery arrests and subsidy cuts signal a painful new era for China’s green energy companies

“Inevitably, at some point in time, order had to be restored to that market, and definitely some of the projects have been caught with their pants down.” — commenting on the fallout from China stripping away green energy subsidies.

Key Takeaways:

• A Chinese solar executive’s arrest in Australia for bribery highlights the clash between Chinese and overseas business practices
• China’s shift to market-oriented pricing for green energy is exposing massive overcapacity, forcing solar and wind producers to consider curtailment rates

By Rene Vanguestaine and Doug Young

For China’s green energy sector, harsh new realities are setting in both at home and abroad. On the international front, Chinese companies are colliding with strict Western anti-corruption standards, underscored by the recent arrest of a solar executive in Australia. On the domestic front, meanwhile, a massive buildup of green energy capacity is slamming into a painful shift toward market-oriented pricing. Both events serve as rude awakenings for an industry accustomed to operating under different rules and generous state support.

We’ll start with the overseas reality check. On July 24, Zhu Guoxin, an executive at solar inverter maker Shenzhen Growatt New Energy, was arrested in Australia. He was charged with trying to bribe an official from the Clean Energy Council, which oversees the certification of renewable energy products in Australia, with $20,000 hidden in a bag of tea during a July 9 meeting.

While giving bribes used to be a common business practice in China, the government has taken steps to stamp it out. Under President Xi Jinping, China has spent about 12 years sending people to jail for corruption with plenty of news coverage. Yet, it’s a never-ending story, and we’re not confident the practice will ever completely stop.

This case is one of the first we’ve seen of a Chinese businessman arrested overseas for trying to bribe a local official. If you’re a Chinese company planning to export products, you need government approval. We would have hoped the Chinese government would educate would-be exporters on Western overseas practices — especially concerning bribes to win business. But apparently that isn’t happening, or some executives simply don’t believe the warnings. In developing markets like Africa or Southeast Asia, state-owned Chinese companies can often compete by offering favorable trade-offs, like access to the Chinese government, rather than outright cash. But in the Western world, there’s a strict level of oversight on who wins these contracts.

It’ll be interesting to monitor how Beijing reacts to this trial. The government is famous for getting outraged and engaging in tit-for-tat actions when its citizens are detained overseas. If Beijing is truly serious about eliminating corruption, we’d expect a mild diplomatic reaction calling for due process, rather than noisy outrage. Since news of the arrest will inevitably reach China, it wouldn’t look good for Beijing’s domestic anti-corruption image if it tried to help a citizen avoid consequences for bribing a foreign official.

Confronting domestic overcapacity and market-oriented pricing

Back in China, the green energy sector is facing its own messy economic situation. The government is moving its solar and wind power producers toward a more market-oriented pricing system, sending shock waves through the industry. These companies thrived for a long time because the government ordered the grid to pay set prices above market rates as a form of subsidy.

But following a massive construction boom of new capacity, the government is rapidly removing many of those subsidies. The shift hasn’t happened overnight — there are cases where solar manufacturers supplying panels to these plants were warned well in advance that everything was moving toward market-based pricing. Still, the situation is exacerbated by severe regional mismatches, with supply often far outstripping demand. The overall result is huge amounts of capacity being forced to sit idle. We’ve seen instances where developers are now building in curtailment assumptions — essentially non-operating capacity — of as much as 40% in their baseline models for new projects. That’s a staggering jump from the 5% to 10% seen in the past.

This overproduction mirrors what we’ve recently seen in the EV sector. Order inevitably had to be restored, and many projects have been caught off guard. When promoters have to assume 40% of their capacity won’t be productive while simultaneously receiving lower market prices instead of subsidies, it’s not an encouraging environment. As highlighted in a recent story about Xinyi Energy Holdings (3868.HK), profits are diving as the sector suffers from a “solar hangover” caused by the phasing out of subsidies and falling prices. Similarly, Concord New Energy (0182.HK) has seen its profits plunge amid power curtailment and intensifying competition in market-based electricity pricing.

We expect that some weaker projects will simply be abandoned or disappear, which is typically how overheated, irrational markets clean themselves up. Moving forward, new project construction is definitely going to slow down. Developers will be much more cautious. The big unknown in any power generation equation now — in China, as well as the U.S. and Europe — is AI. We wouldn’t be surprised if future projects become specifically tied to AI development, as that’s where the big new demand is expected.

China is also dealing with a chicken-and-egg situation. While the country committed to green energy emission reduction targets, traditional coal power remains largely in the hands of state-owned enterprises. These entities aren’t thrilled about losing sales, creating a distorted environment where wind and solar energy is left idle instead of being absorbed into the national grid.

The implications are grim across the supply chain, from polysilicon at the source all the way up to solar panels. Chinese manufacturers, who produce close to 80% of the world’s panels, are already facing overseas sales constraints in the U.S. and increasingly in Europe. This domestic transition only exacerbates their tight situation. We’ve been expecting consolidation where weaker producers eventually disappear, but it isn’t happening as fast as some thought. Consequently, the stock prices of U.S.-listed Chinese solar manufacturers have come down substantially over the last six or seven months. It’s a painful adjustment, leaving little room for optimism in the near term.

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China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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