Suggestion to Beijing: Let Suntech Fail 建议中国政府:让尚德倒闭

The past 2 weeks have seen solar energy pioneer Suntech (NYSE: STP) plunge into a downward spiral after revelations of questionable accounting, leaving the firm on the edge of financial collapse and its fate largely in the hands of Beijing.  But rather than come to Suntech’s rescue, Beijing should let the company collapse to send a high-profile message that it won’t support companies that engage in such financial shenanigans.

Suntech was once one of China’s brightest stars, making international headlines when it became the country’s first solar panel maker to list overseas in 2005. But its woes began a year ago when the global solar sector started to suffer from massive oversupply that sent most major players into the red.

While the downturn wreaked havoc on everyone, Suntech’s own woes grew considerably worse a couple of weeks ago when it disclosed it may have been the victim of fraud that could leave it liable for guaranteeing a third-party loan worth more than $600 million. (previous post)

As the scandal unraveled, it became increasingly apparent that the company that allegedly defrauded Suntech, called GSF, was actually majority-owned by Suntech. Furthermore, it appeared that Suntech had been selling its panels to GSF for years at high prices and including the sales in its quarterly reports – a practice that may have been technically legal but was still highly misleading to investors.

The disclosure of the potential fraud, combined with revelations of the financial accounting tricks, have taken a toll on Suntech’s stock, which now trades at around $1 – far below its all-time highs of more than $80 per share and even well below its 2005 IPO price of $15. Now the company is facing several investor lawsuits, and could soon be subject to an investigation by the US securities regulator. It also has more than $500 million in debt coming due early next year that it may not be able to repay.

With all those problems hovering over it, Suntech could have difficulties surviving much longer without financial support from Beijing. But the company has already caused so much damage that Beijing could send an important message to both Chinese companies and financial markets by refusing to provide such a lifeline.

At the most basic level, Suntech has already cost its own investors millions of dollars in money they will probably never recover, partly due to its financial accounting tricks. More broadly, this new scandal will help to prolong a wider confidence crisis that has punished most overseas-listed Chinese stocks over the last year, causing many to lose half of their value or more due to a series of similar accounting scandals.

Lastly, the US and Europe are accusing Beijing of unfairly subsidizing Suntech and other Chinese solar firms with policies like cheap financing they could never get from commercial banks, so rescuing Suntech now would only help to confirm those accusations. By letting Suntech fail, Beijing could help to send a loud message both to global investors and its own companies that it won’t tolerate accounting shenanigans, and also that it will stop unfairly supporting its focus industries by giving them wide-ranging special treatment unavailable to foreign rivals.

Bottom line: Beijing should let Suntech fail to send a message to its companies that it won’t tolerate accounting tricks that ultimately damage the reputation of all Chinese companies.

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