Policymakers take first steps to curb overinvestment in solar manufacturing

China’s solar manufacturing sector has been caught in a downward spiral of overinvestment and ruthless competition for months. Prices across the solar supply chain have fallen over 60 percent this year. In November, regulators announced measures to promote more “orderly” competition. The Ministry of Finance and State Administration of Taxation reduced the tax rebate for exports of solar modules, cells, and wafers from 13 percent to nine percent, effective December 1. In addition, revised regulations from the Ministry of Industry and Information Technology raised the minimum capital ratio conditions for investment in solar PV projects from 20 to 30 percent.

These steps show that policymakers understand they need to intervene to cool the market. Yet any efforts are unlikely to be a game changer, since they will not impose any hard constraints on continued investment. Companies will still be incentivized to expand investments in production to gain an edge where possible. For instance, at a recent meeting of industry leaders, LONGi chairman Zhong Baoshen stated that his company aims to have the largest fixed asset investment among solar firms in the second half of 2024. At the end of the day, Chinese companies remain locked in a tussle for market share.

The challenges facing the solar industry are an outcome of Beijing’s support for the manufacturing sector and industry-led growth. Financial institutions and investors are encouraged to support solar firms, since they align with Beijing’s priorities to strengthen industrial output and the green technology sector. Under these circumstances, the number of newly registered solar companies grew at an average 22 percent annually from 2021 to 2023. More forceful measures to reverse this course are unlikely given that policymakers consider a degree of excessive investment as part and parcel of their industrial policy model and conducive to creating competitive markets.  

Alexander Brown, Senior Analyst at MERICS, says: “The overcapacity problem facing China’s solar sector reveals the pitfalls of China’s economic model centered on strengthening industry. Local governments and private investors continue to channel financing to state-backed sectors even as market conditions deteriorate. This pushes down prices both in China and abroad. The same dynamic is present in other green tech areas such as electric vehicles and electrolyzers.”