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US Trade Smackdown Keeps Chinese Solar Beaming

18 July 2014 in Trading Ideas

Chinese solar stocks continue to rally from their 2014 low of just two months ago, most recently with a little help from the World Trade Organization.

Earlier this week, the WTO judges ruled that the US had violated global trade rules by imposing punitive import duties on a range of Chinese steel products, solar panels and other goods that Washington said enjoyed government subsidies.1

As the Financial Times noted, the US has tried for years to build a case against Chinese state-owned enterprises, saying the entities benefit from both overt and hidden subsidies that unfairly lower their costs of production. It has argued that those amount to government subsidies to China’s exports, which are banned by the WTO.

 

The three WTO judges reaffirmed a 2011 judgment that set a narrow definition for what could be considered a government entity, the FT said. According to that ruling, state-owned companies could not be simply considered “public bodies” because they were majority-owned by governments. Instead, the panel said, the US had to prove that Chinese state-owned enterprises also performed “government functions” or exercised “government authority.”

In perhaps the most unsurprising statement of the year, the ruling was welcomed by the commerce ministry in Beijing, which, according to the FT, called on the US “to ensure an environment of fair competition for Chinese enterprises.”

The ruling immediately lifted many Chinese solar stocks – JinkoSolar, Hanwha Solarone and Trina Solar all gained 2.5%, according to Marketsemerging.com.2

Those three stocks also comprise nearly a 40% weighting in the Chinese Solar motif, which has gained 2% over the past month; the S&P 500 has also gained 2% during that period.

Over the past 12 months, the motif has increased 12%. The S&P 500 has risen 19.7% in that time frame.

However, the sweet irony for those investing in Chinese solar stocks is that the recent lift from the WTO’s ruling merely added to the rally in the sector that shrugged off the original news of the US’ intention to impose duties.

As we pointed out just three weeks ago, many investors didn’t see the US tariffs having much impact.

As the Wall Street Journal recently reported, Chinese manufacturers have already pivoted away from the US, where demand is slowing, to feed a growing appetite for solar panels back home.3

US imports of Chinese-made solar products last year fell to $1.49 billion, less than half the $3.12 billion imported in 2011, according to the U.S. Commerce Department, which cited US census data, the Journal said.

Meanwhile, China recently set an ambitious target of boosting its solar-panel capacity to 35 gigawatts by 2015, up from around 18 gigawatts now, which would put it on par with Germany, the current world leader.

It’s that belief in the ultimate market opportunity that could be a big part of the two-month bounce in Chinese solar stocks.

1Shawn Donnan and Lucy Hornby, “WTO rules against US on China state companies,” ft.com, July 15, 2014.

2Chad Roskin, “Chinese Solar Stocks Shining on Good News: JinkoSolar Holding, Hanwha Solarone, Trina Solar,” marketsemerging.com, July 14, 2014, http://www.marketsemerging.com/chinese-solar-stocks-shining-on-good-news-jinkosolar-holding-co-ltd-nysejks-hanwha-solarone-co-ltd-nasdaqhsol-trina-solar-limited-adr-nysetsl/1710677/.

3Liyan Qi and Wayne Ma, “US-China Solar-Products Dispute Heats Up,” wsj.com, June 4, 2014.

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