* Investment arm of Wuxi govt offers to invest $150mn, restructure assets
Follows offer from Shucheng to buy Suntech's China subsidiary
* Investors to see shares diluted
* Rising demand for solar products means injection makes sense for China - economist
By Pete Sweeney
SHANGHAI, Oct 31 (Reuters) - Struggling Chinese solar panel maker Suntech Power Holdings Co Ltd is set for a $150 million local government bailout, a step towards tackling its $2.3 billion debt pile that is at odds with Beijing's effort to wean the sector off state support.
The lifeline comes from the municipal government of Wuxi, an eastern city where Suntech's Chinese subsidiary is headquartered, and follows Shunfeng Photovoltaic International Ltd's signing of a preliminary deal to buy its bankrupt Chinese unit.
China has said it wants to encourage consolidation to deal with entrenched overcapacity clogging the clean energy sector, a legacy of the stimulus spending the poured in after the global financial crisis, but the political will to close down inefficient, loss-making operations has been in scant evidence, given the impact such closures have on local employment.
Again and again, local governments have used taxpayer money and influence over local banks to avert domestic bond defaults and keep necrotic businesses breathing. The country has never experienced a formal domestic bond default.
In a statement on its website, Suntech said it had received a letter of intent from Wuxi Guolian Development Co Ltd , the investment arm of the city government, saying it would invest $150 million to support restructuring.
"In addition, it is intended that Guolian would, upon satisfactory terms and conditions, cause related solar and other businesses it owns to be injected into the company," the notice, posted late on Wednesday, said.
It quoted Suntech CEO Zhou Weiping warning that investors would take a hit from the transaction, at least on paper.
"While there will be substantial dilution for existing shareholders, the successful implementation of these efforts will preserve the company's international platform, rebuild the company's operating assets, and rehabilitate the company's global brand," he said.
Morningstar analyst Stephen Simko said in a research note that, despite the aid, "Suntech remains a toxic name".
"Although this represents forward progress of a sort, it's not nearly enough to provide any comfort for long-term investors," he wrote, adding that the company still had assets tied up by fraud allegations in Italian courts.
In the aftermath of the global financial crisis in 2008/09, China and other countries embarked in a clean energy investment spree, seen as ways to benefit the environment while creating jobs.
Many Chinese municipal and regional governments sprang to create local solar power champions to benefit from subsidies, but the result was massive overinvestment in China that saw the industry thrown into crisis when foreign markets - in particular in Europe - stopped subsidizing solar power.
Suntech Power defaulted on a $541 million dollar overseas convertible bond in March.
Those bonds are now trading at 2/5 cents on the dollar, indicating that offshore holders expect to salvage nothing from Suntech. Bondholders are to vote on restructuring next month.
Wuxi Suntech, the Chinese subsidiary of Suntech Power, filed for bankruptcy protection five days after its parent company's default - one of the biggest by a Chinese company.
However, Zhang Zhiming, head of China research at HSBC in Hong Kong, while noting the economic costs of continuous bailouts, said that in addition to serving political priorities, in particular preserving employment, the Suntech deal made a degree of economic sense for China.
"The whole solar sector has experienced a bit of upturn in terms of global demand, and that supports the case for the capital injection."