Analysis: Nix on Ningxia Wind Power Deal

by Bill Dodson

Far East Wind Power and the Beijing Tongchuang Hengyuan Technology Development Company have recently signed a Letter of Intent to undertake a joint venture to finance a wind farm in Ningxia Hui Autonomous Region. The windfarm would produce 50MW of electricity, with the provincial government announcing in 2006 nine wind power projects with a combined capacity of around 2GW. Ningxia is in north-central China, squeezed up against the southern border of Inner Mongolia. Far East would take 49% percent of the shares to Beijing Tongchuang’s 51% . Far East is a publicly traded American investment company (FEWP) overseen by overseas Chinese and American finance veterans with an office in Beijing. As of this writing Far East was trading at about $.44, with a plainly downward trend in share value since February 2010 (then at a high of about US$1.50). An online search in English and Chinese language turns up virtually nothing about the potential Chinese partner, Beijing Tongchuang, which leads me to believe it is local government finance vehicle (LGFV), a company constructed by provincial- and/or district-/city-/county-level (take your pick) governments for the purpose of obtaining loans from banks. James Kynge writes extensively about LGFVs in the Financial Times article “Financial frailties might slow China’s growth”. Kynge conservatively estimates LGFVs throughout China have accumulated more than US$1 trillion in debt since the beginning of 2008, when the central government opened the vaults of the State-owned Banks to loan money primarily to State-Owned Enterprises (SOEs), local governments (primarily through LGFVs) and to property developers. Upwards of a third of the loans, according to Kynge, may be unrecoverable. Typically, local governments create several LGFVs to extract loans from different banks, collateralizing the same land in their jurisdictions multiple times. The greatest problem with these loans – in addition to over-leveraging – is the lack of transparency in appraisals, loan transactions and ownership holdings – which, in China, is typically convoluted specifically to thwart close scrutiny.

The theory of a finance company – especially foreign – partnering with a local government to help build a renewable and clean energy business is laudable – especially in a region as poor as Ningxia. However, the typical lack of definition and transparency with which Chinese governments do business is a strong concern, especially in light of the debt load most local governments are carrying now. Further, of course, are the issues of actually monetizing wind power in China, where some local districts would prefer the turbines turned off to pander to local coal-producers that prefer demand for their product remain high, and power plants that may find additional capacity devalues commitments they’ve already made to coal-generated power.

Whatever the true nature of the deal between Far East and Beijing Tongchuang, realizing shareholder value even in the long-run will be difficult indeed.

Further reading: BusinessWeek, Wind Power Monthly