China sent an important message to the struggling solar panel sector last week when one of the country's major manufacturers was forced to turn to global capital markets to raise new funds, hinting that it couldn't receive the money from State-backed domestic sources. The move sparked a sell-off for New York-listed shares of Yingli Green Energy Holding Co, as its request for funds met with a frosty response on Wall Street.

The fact that Yingli had to seek funding from Western investors indicates the Chinese government is taking a hands-off approach to financing for this important but embattled industry as it tries to emerge from a three-year slump. Chinese leaders should continue to send similar signals not only for the solar sector but also other key industries, in a broader effort to wean them from State support and create sustainable companies that can become global leaders.

Yingli hasn't posted a profit for more than two years, and reported a net loss of $128 million in its most recent reporting quarter. The company and most of its peers have been losing money since 2011, when the industry tumbled into the red due to overcapacity.

The downturn caused many firms to go bankrupt, with former giants Suntech and LDK Solar as the two most prominent examples in China. In the meantime, the financial position of surviving players like Yingli remains weak as prices finally start to rebound. To shore up its position, Yingli turned to Wall Street last week to raise a relatively modest $83 million through the issue of new American Depositary Shares in New York where its stock is currently traded.

The company ultimately sold the shares for $3.50 each, or more than 20 percent below its stock price when it first announced the plan. The need for such a big discount reflected ongoing investor concern about both Yingli and broader prospects for the solar sector's recovery. The announcement of the discount sparked a sell-off in Yingli's shares, which tumbled 18 percent in the three trading days after the plan was first announced, wiping out around $100 million in shareholder value.

Yingli's decision to tap Western markets for its fundraising followed two similar earlier developments that showed the Chinese government was taking a more hands-off approach to the solar panel sector in the uphill climb from its downturn.

The first of those came in February, when Canadian Solar announced plans to issue new stock and bonds to raise $200 million. That announcement ignited a smaller 8 percent sell-off in Canadian Solar's shares as investors also greeted the plan with limited enthusiasm, even though the company is one of the few to recently return to profitability.

The second sign of the government's laissez-faire approach came last month when mid-sized panel maker Chaori Solar missed an interest payment on some of it domestic bonds, becoming the first default on such domestic corporate debt in modern Chinese history. Many viewed that move as a sign that officials were preparing to allow similar defaults on corporate debt, abandoning their past practice of sending in State-run entities to rescue such companies.

In all three cases, it would have been quite easy for central officials or local governments to come to the assistance of Canadian Solar, Chaori and Yingli. Officials could have provided critical assistance in a number of ways, such as ordering local State-run banks to make low-interest loans or calling on other State-run entities to provide funding.

But in each instance, the government has shown its determination to let market forces dictate developments, even if that meant wiping out millions of dollars in investor value or shaking the domestic corporate bond market by signaling the potential for more defaults. Such actions may cause some pain in the short term for companies, their investors and local economies, but will help create a profitable sector that can be commercially viable over the longer term.

The Chinese government should extend this market-oriented approach to other sectors that are also struggling with overcapacity, such as steel and aluminum, which would help build commercially viable industries over the long run. In place of direct financing, it could gradually introduce less aggressive, more Western-style incentives like tax breaks to foster growth in sectors it wants to develop.

Such an approach will inevitably create some pain for the affected sectors, forcing plant closures and losing investment dollars. But it will put China's economy on a sounder footing to ensure healthy sustainable growth.