The huge funds that flow into China's solar sector, in which local governments hold stakes, have boosted production in the first half despite fragile demand, depressing product prices and setting off an anti-dumping probe by the United States.
State banks provide easy loans to the sector amid the Chinese government's push to develop clean energy. Provincial governments that have helped build solar companies are also pressuring banks to continue lending, which may add to the woes of the struggling industry.
The glut of production and swelling inventories of the panels that turn sunlight into electricity have already driven down prices by about 40 percent so far this year. Analysts expect prices to slide by another 10 percent by early next year.
"The longer and larger the Chinese bank lending bubble for solar inflates, the sharper and more unpredictable will the eventual fundamental correction be due to industry consolidation," Credit Suisse analyst Satya Kumar said.