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One of China's star stock sectors is under fire and unlikely to emerge unhurt in the long run.

The Chinese green energy sector had been a top performer until this weekend. But politics got in the way. The sector has fallen victim to currency politics between Washington and Beijing.

On Friday, the U.S. Treasury was due to report on whether it would investigate China for being a "currency manipulator". The Obama administration is under heavy pressure to deal with complaints about job losses to China as mid-term elections approach. But to the surprise of some, Treasury Secretary Tim Geithner took a soft line with Beijing.

The Treasury delayed the release of a report on whether China "manipulates" its currency. Noting that the yuan has climbed more than 1 percent a month since Sept. 2nd, Geithner relented. The Treasury said this pace, "if sustained...would help correct" what the U.S. considers an undervalued currency.

Geithner had warned that branding China a manipulator wouldn't accomplish anything. In fact the consequences of such a label could worsen the currency wars that are brewing among many nations – not just between China and the U.S.

But, the U.S. did not let trade tensions pass without firing a shot across China's bow. In a good cop/bad cop routine, the U.S. aimed its ire at China's much vaunted green energy sector.

Shooting Down China's Star

For more than a month, the Obama administration has come under pressure from the United Steel Workers to crack down on Chinese green technology products. The USW accuses China of blocking access to materials used in green technologies, illegally linking subsidies to export sales, curbing imports and demanding that foreign investors hand over technology secrets.

The USW also accused China of providing more than $216 billion worth of subsidies to green tech makers. The union charges that Chinese subsidies amount to "more than twice as much as the U.S. spent in the sector, and nearly half of the total 'green' stimulus spent worldwide".

With America's green energy industry lagging, Obama acted. U.S. Trade Representative Ron Kirk took up the complaint. It alleges that China's policies have caused the annual U.S. trade deficit in green-technology goods. It accuses China of being the top contributor to the U.S. global trade deficit in the sector. China denies the allegation, calling it groundless and irresponsible.

The U.S. decision caused steep losses in the Chinese solar sector.

SYMBOL Company name Share Price Change Chg %
STP Suntech Power Hldgs. 9.42 -0.60 -5.99%
TSL Trina Solar Limited (ADR) 27.87 -2.75 -8.98%
JASO JA Solar Hldgs. Co. 9.11 -0.74 -7.47%
YGE Yingli Green Energy 13.12 -0.43 -3.17%
SOLF Solarfun Power Hldgs 11.07 -0.60 -5.14%
CSIQ Canadian Solar Inc. 15.5 -1.16 -6.96%
SPWRA SunPower Corporation 14.12 -0.40 -2.75%
LDK LDK Solar Co., Ltd. 12.12 -0.53 -4.19%
CSUN China Sunergy Co., Ltd. 4.68 -0.12 -2.50%

Now that China's green energy sector has become embroiled in the currency wars, shares should be affected for some time to come. Investors will be wary of a sector that could be hit at any time by trade sanctions or other measures.

What's Next?

The U.S. plans to pressure Beijing to continue edging the value of the yuan upward. America also expects to have allies at a meeting of foreign ministers from the Group of 20 nations next week in South Korea, and at a summit there in November.

As I've mentioned before, there is a danger of a currency war.

The U.S. isn't alone in feeling that China has undervalued its currency. Several other countries including Japan and Brazil have taken measures to drive the values of their currencies down. The U.S. policy of "quantitative easing", better known as printing money, is another strategy to weaken to greenback, making U.S. exports more competitive.

As for green energy stocks, the timing of the two U.S. actions suggests currency tensions and Chinese green stocks are now linked. Sorting out a new global of regime currency valuation won't be easy. And it won't be quick. For the time being, we can expect China's solar stocks to linger under a cloud of currency tensions.

Disclosure: No positions

Source: Why China’s Solar Sector Will Suffer Under Currency Tensions