Gov't bailout plan for LDK Solar sparks controversy

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A bailout plan created by the government of the city of Xinyu for LDK Solar, one of the world's largest solar wafer manufacturers, has sparked controversy in China regarding its credibility.

The Xinyu Municipal People's Congress, the city's legislative body, passed a resolution on July 12 that included the repayment of 500 million yuan (79 million U.S. dollars) in loans extended to LDK Solar by the Huarong International Trust and Investment Corp. in the city government's annual fiscal budget.

The use of public funds to repay the debts of a private company, a rarity in China, has aroused heated debate.

"The fiscal budget is for public service, not for the development of a company," Shi Zhengwen, director of the taxation and financing research center of the China University of Political Science and Law, was quoted as saying by China Business News.

"LDK Solar is just a leading company in a competitive industry, and it has no bearing on major public interests and economic security," Shi said. "The government cannot repay a company's debt just because it pays more taxes and employs more people," he said.

LDK Solar, established in 2005, was the first company in east China's Jiangxi Province to be listed on the New York Stock Exchange. It employs more than 20,000 people and paid 1.3 billion yuan in taxes in 2011, almost 12 percent of the city's total fiscal revenues.

LDK Solar is ranked 266th on Forbes' list of the top 500 Chinese companies for 2012. The provincial government has stated its desire to turn the photovoltaic industry into pillar industry, with LDK Solar expected to have annual sales of 100 billion yuan in 2015.

The drastic expansion has made LDK Solar a shining star in China's new energy industry. But shrinking demand for solar products and dropping prices for panels that convert sunlight into electricity have forced several companies in China, Europe and the U.S. to shut down their operations.

LDK Solar had sales revenues of 13.93 billion yuan and suffered a net loss of 5.49 billion yuan in 2011, according to its yearly report. Its total debt amounted to 30.23 billion yuan by the end of 2011.

The company saw it sales drop by 185 million U.S. dollars in the first quarter and posted a gross margin of negative 65.5 percent due to serious price erosion.

The Xinyu municipal People's Congress defended its bailout plan in an exclusive interview with Xinhua on Thursday.

LDK Solar has amassed funds and already paid back its 500-million-yuan debt, which was borrowed on June 2009 and due on June 29 to Huarong International Trust and Investment Corp. It borrowed another 500 million yuan in three-year-term loans from the same company due to operational difficulties, said Zhao Hongming, speaker of the standing committee of the municipal People's Congress.

In order to prompt the goverment to urge LDK Solar to pay back the debt in time, Huarong International Trust and Investment Corp. asked the government to put the debt in the government's annual fiscal budget, Zhao said.

LDK Solar has provided its assets as a mortgage, he said.

LDK Solar is a pioneer in China's photovoltaic industry and a helping hand from the government will be conducive to the industry's development and local employment, he said.

President and chief operating officer of LDK Solar Tong Xingxue told Xinhua that as an export-oriented enterprise, LDK has encountered some difficulties, as the U.S. has levied anti-dumping taffifs on its products and the European debt crisis has deepened.

"LDK will use its earnings to pay the loans and use its assets as a mortgage. Its legal representative and board chairman Peng Xiaofeng will provide his personal guarantee," he said.

"The government is not paying for LDK's debt," he added.

But analysts doubt whether the company is capable of paying the debt back, as the price of polysilicon, one of the company's major products, dropped from 400 U.S. dollars per kg in 2008 to 20 U.S. dollars per kg on July 10 this year.

The local government, which pinned a great deal of its hopes on LDK, is finding itself in a dilemma following the industry's slump, said Ye Tan, a renowned financial analyst.

The government-led economic development model has exacerbated risks, as banks have vied to give loans to government-supported enterprises. The companies then expand their businesses aggressively with the loans. But when a crisis comes, they look to the government to bail them out, Ye said.

It's time for companies that have grown dependent on the government to "regain their consciousness" and compete in the market independently, she added.

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