Holders of Chinese solar stocks got a little taste of what a trade war could feel like.  Trina Solar fell more than 9 percent as U.S. Trade Representative, Ron Kirk, announced his office has launched an investigation into the Chinese government’s policies affecting trade and investment in green technologies.   This, from the official press release,

The petition alleges that China employs a wide range of World Trade Organization (WTO)-inconsistent policies that protect and unfairly support its domestic producers of wind and solar energy products, advanced batteries and energy-efficient vehicles, among other products, as China seeks to become the dominant global supplier of these products. According to the petition, these policies include export restraints, prohibited subsidies, discrimination against foreign companies and imported goods, technology transfer requirements, and domestic subsidies causing serious prejudice to U.S. interests. The petition further alleges that China’s policies have caused the annual U.S. trade deficit in green-technology goods with China to increase substantially since China joined the WTO, making China the top contributor to the U.S. global trade deficit in the sector.

The announcement gives the Administration some political breathing room and was no doubt coordinated with the delayed release of the Semiannual Report on International Economic and Exchange Rate Policies, which may label China as a currency manipulator.  In today’s press release, the Treasury stated,

Secretary of the Treasury Timothy Geithner recognized China’s actions since early September to accelerate the pace of currency appreciation, while noting it is important to sustain this course.

Since June 19, 2010, when China announced it would renew the reform of its exchange rate and allow the exchange rate to move higher in response to market forces, the Chinese currency has appreciated by roughly 3 percent against the U.S. dollar. Since September 2, 2010, the pace of appreciation has accelerated to a rate of more than 1 percent per month. If sustained over time, this would help correct what the IMF has concluded is a significantly undervalued currency…

The Heads of State, finance ministers, and central bank governors of the G-20 and the Asia-Pacific region will participate in several important meetings over the coming weeks. These meetings provide an opportunity to make additional progress on the important challenge of securing stronger and more balanced growth.

The Treasury will delay the publication of the report on international economic and exchange rate policies in order to take advantage of the opportunity provided by these important meetings.

Let’s hope and pray the “currency war” doesn’t escalate into a trade war as what happened today in Chinese solar is just flea bite to what will come to the global economy and markets.    We don’t think it will, but the risk should be closely monitored.  Stay tuned!