Over the past five years, China has invested heavily in its wind and solar industries so as to dominate the world market. But as Keith Bradsher reports in the New York Times today, that strategy is backfiring. The world is buying more solar panels and wind turbines, but China's manufacturing capacity has grown even faster, thanks to state subsidies. There's too much supply. So China is rethinking its strategy:

Maybe we should slow down? (STR/AFP/Getty)

The result is a looming financial disaster, not only for manufacturers but for state-owned banks that financed factories with approximately $18 billion in low-rate loans and for municipal and provincial governments that provided loan guarantees and sold manufacturers valuable land at deeply discounted prices.

China’s biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. ...

The outcome has left even the architects of China’s renewable energy strategy feeling frustrated and eager to see many businesses shut down, so the most efficient companies may be salvageable financially.

To get a sense for the scale here, we can compare what China and the United States have done for solar in recent times. As part of the stimulus program, the U.S. Department of Energy has handed out roughly $14 billion in federal loan guarantees to domestic solar projects since 2009. Most of this money has gone into R&D and advanced technologies—including, yes, $535 million for Solyndra. (There has also been a refundable tax credit for anyone who generates electricity from solar power in the United States, but that benefits all companies equally.)

By contrast, China's state-owned banks alone have shelled out $18 billion in low-rate, preferential loans to solar companies over the past five years — most of which have gone to basic factories and manufacturers. In addition, China's local governments have provided a slew of loan guarantees and cheap land to solar producers. Bradsher reports that the total subsidies could come to $50 billion over the next 20 years for every 10 gigawatts of solar power installed. That's an enormous difference.

So it's not surprising that China now dominates the solar market. The country has about two-thirds of the world's solar manufacturing capacity and was churning out panels for less than $1 per watt at the end of 2011, about 20 percent cheaper than anywhere else on Earth. That helps explain why, in the United States, the retail price of solar power has fallen by half and why rooftop installations doubled in 2011.

But the party may end soon. Bradsher reports that China's economic planners want to cut off loans for all but the strongest solar manufacturers and let the rest go bankrupt. Would that be a good thing? It depends. The price of Chinese solar panels would likely rise as a result. That would provide a boost to U.S. solar manufacturers who have been struggling against cheaper Chinese imports. (In May, the U.S. Commerce Department slapped a 31 percent tariff on imports of silicon photovoltaic cells from certain Chinese manufacturers, alleging that they were unfairly subsidized.)

Over at Resources for the Future, Nathan Richardson takes a different view: "[C]heap solar panels are fantastic in their own right," he notes. "It doesn’t really matter who makes them. If we can buy cheap panels from China, we can spend the resources we’d otherwise use on other things. ...  China’s solar policy may not be a good idea economically (for China). But they are doing their bit, perhaps unintentionally, to build the technology that can avert climate change."

In any case, not all analysts are convinced that the surge in U.S. solar installations would collapse if China were to consolidate its solar industry. Back in May, in a policy brief for the Center for American Progress, Melanie Hart and Kate Gordon pointed out that the key drivers of America’s solar surge have been demand-side policies, such as tax credits for installation or state-level renewable energy standards, and not low Chinese prices. “If you look within the U.S. market,” Hart and Gordon write, “there is a huge amount of variation from state to state, and that variation is primarily due to differences in state incentives.”

So China's frantic push to hand out cheap solar panels (and wind turbines) to the rest of the world could soon slow down. But that won't necessarily mean the end of the world's recent solar-power boom — that will depend on whether countries like the United States enact further policies to boost renewables or not.

Related: Are we wildly underestimating solar and wind power?