EU Likely To Impose Further Sanctions On Chinese Solar Firms

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Doug Young

Bottom line: A widening investigation into violations of an anti-dumping solar panel settlement between China and the EU is likely to result in punitive sanctions, dealing a blow to the Chinese panel makers.

What started as some quiet rumblings earlier this week is quickly brewing into a major storm, with word that a landmark settlement between the EU and China a year ago to resolve an anti-dumping dispute over solar panels is quickly unraveling. In this case it’s probably more accurate to say the settlement was between the EU and actual Chinese solar panel makers, rather than an agreement between governments. That’s an important distinction, since Chinese companies are often far more likely to try to undermine such agreements by exploiting loopholes, unlike central governments that are usually a bit more trustworthy.

According to the latest headlines, the European Commission is expanding its probe to include a number of other firms from the 3 originally targeted, as it looks into complaints that Chinese solar panel makers are violating the year-old agreement that was supposed to resolve a dispute over unfair state support. Under the agreement, the Chinese companies agreed to voluntarily raise their prices to levels comparable with their western rivals to offset any advantage they might get from state support via policies like cheap government loans and subsidized land use.

The matter first poked into the headlines earlier this week when media reported that ReneSola (NYSE: SOL), Canadian Solar (Nasdaq: CSIQ) and ET Solar were being probed for potential violations of the agreement.  The reports weren’t more specific, but both ReneSola and Canadian Solar issued statements confirming they were being queried.

Now media are reporting that the European Commission’s widening investigation has seen goods seized in the European warehouses where imported panels are stored. (Chinese article) The reports say the EU has also sent lawyers to the companies’ headquarters in China to conduct inspections. All of this hints that things are developing quickly, and the Chinese panel makers could soon fine themselves formally accused of violating the agreement and subject to punitive tariffs.

The report I read didn’t name any sources for the news, but it appears to be based on interviews with officials from the Chinese solar panel makers who are probably worried about losing access to one of their biggest markets. The report specifically mentions that ReneSola, which sold more than a third of its panels to Europe last year, was saying it would pull out of the settlement agreement.

ReneSola’s intention is a bit strange if it’s true, since such a move would immediately subject the company to threatened punitive tariffs it was trying to avoid. Thus its intention would look a bit like an admission of guilt. I previously said that such violations wouldn’t surprise me at all, since Chinese firms are famous for signing agreements and then immediately looking for loopholes that allow them to undermine their partners.

Rumors that such violations were occurring have been common in industry circles, and a contact explained one scenario that companies are using to circumvent the agreement. Under that scheme, the companies sell their panels to buyers at the prices stated under the agreement. But then they tell the buyers to set up fake service and consulting companies, and rebate money to those customers by paying for bogus services.

Surprisingly, Chinese solar shares weren’t moving very much in the latest trading session in New York, with most up or down by less than 2 percent. But I suspect that’s because this is a breaking story and the latest news has yet to get priced in. At the end of the day I expect the Chinese companies will lose any credibility they had left in the European Commission’s eyes, and the EU will go through with its original plan and impose punitive tariffs similar to what the US has already done.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

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