It was bound to happen sometime.

AS AMERICA’S WAR on Iran roils energy markets, China’s clean-energy companies should be cashing in. The country makes over 80% of the world’s solar panels, churning them out in vast quantities. Thanks to such efforts, renewable sources generated more electricity than coal last year around the world. Yet China’s solar industry, though world-beating, is in turmoil. And the war will not be enough to steady it.

China’s solar exports have seen a boost since the bombing began. But that will be small cheer to its companies, as they face three daunting problems. Domestic demand for their products is falling for the first time in decades because the country’s power grids—far and away the biggest market for solar panels—have become overloaded with the things. Solar-panel supply, meanwhile, is overabundant because of years of splashy investment in factories. And protectionism in overseas markets is rising. These problems also converge at an ugly time. Most companies have been running at a loss since 2024 owing to brutal price wars, and bankruptcies are mounting. After blistering growth the world’s solar factory now faces a reckoning.

The solar industry globally has not always been kind to investors. One solar panel is much like another, and improvements made by one producer are rapidly copied by competitors. So companies typically try to scale up as quickly as possible to seize market share. That means production can race far ahead of demand, causing margins to collapse. This tendency led to a lurching downturn in revenues in 2018, for instance, followed by a rebound after demand caught up.

However, as The Economist points out, the largest demand for China’s solar infrastructure is within China and even the Chinese are realizing how inefficient solar is when compared to energy sources, like coal.

The fundamental flaw of command economies — especially those that falsely present themselves as market-based — is the chronic misallocation of capital. Chinese citizens, along with the rest of the world, will ultimately pay a steep price for falling for this illusion. State-owned enterprises are responsible for roughly 70% of China’s entire economic output and therein lies the problem.

PHOTO CREDIT: Pixabay