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BRUSSELS (Reuters) - The European Commission has launched an investigation into suspected dumping of solar panels by Chinese producers, drawing a warning from China that restrictions on its exports will hurt the multi-billion-dollar global clean energy sector.
The investigation into the biggest import sector ever targeted by the Commission stems from a complaint by a group of European solar companies, led by Germany's SolarWorld.
The group, comprising members in Germany, Italy and several other EU countries, says Chinese solar firms have been selling panels below cost in Europe in an effort to gain market share - a practice known as "dumping".
China's solar firms warned in July of a trade war, calling on their government to strike back against the impending investigation. Chinese producers include Yingli Green Energy, Suntech Power Holdings Co Ltd, Trina Solar Ltd and Canadian Solar Inc.
The solar panel industry has boomed in the past several years and become one of the most competitive in the world, with China exporting more than $25 billion worth of panels to the European Union in 2011.
China's immediate response to the announcement of an investigation was more measured, however, and did not mention any retaliatory steps.
"China expresses deep regret," Ministry of Commerce spokesman Shen Danyang said in a statement.
"Restricting China's solar panel products will not only hurt the interests of both Chinese and European industry, it will also wreck the healthy development of the global solar and clean energy sector," said Shen.
He urged the European Union to "seriously consider China's position and proposals, and to resolve friction over solar panel trade through consultations and cooperation".
The Chinese solar industry expanded rapidly on the back of profitable exports to Europe and the United States but is now struggling with severe overcapacity as export markets have shriveled and domestic demand remains insufficient.
China sold about 21 billion euros ($26.5 billion) in solar panels and components to the European Union in 2011 - about 60 percent of all Chinese exports of the product.
The European Union imported goods from China worth a total of 292 billion euros ($368 billion) last year. Imports of Chinese products subject to trade defense duties total less than one percent of that amount.
The United States imposed duties on solar panel imports from China in May after a similar initiative led by SolarWorld there.
The European Commission will examine whether dumping is taking place, whether it is damaging EU industry and whether duties would harm the EU's economic interests.
German Chancellor Angela Merkel, during a visit to China last week, said she preferred a negotiated settlement to the dispute. Her comments frustrated Europe's solar panel producers, who have been pushing hard for the EU to take firm action.
Western solar firms have been at odds with their Chinese counterparts for years, alleging that they receive lavish credit lines to offer modules at lower prices.
The German solar company Q-Cells became the most prominent EU victim of an increasingly competitive market, filing for insolvency in April. At least two U.S. firms have also filed for bankruptcy in the past two years in the face of intense Chinese competition.
However, some European solar companies such as those that install panels say Europe should welcome Chinese imports because they make solar power more affordable and are essential for the 27-member bloc to achieve its goal of having 20 percent of energy from renewables by 2020.
Their alliance, AFASE, called on the Commission to uphold free trade to secure jobs and support industry growth. It said there was a warned of the growing danger of a trade war between Europe and China.
SolarWorld's alliance, EU ProSun, says panel prices dropped by 75 percent from 2008 to 2011 as the Chinese ramped up capacity from almost zero in 2004 until it more than covered global demand for panels last year. It argues prices will still fall, albeit more steadily, if duties are set.
It says China's only production advantage is the cost of labor, which typically makes up some 10 percent of the cost of producing a panel.
"If you don't care about profits you can charge what you like," EU ProSun President Milan Nitzschke told Reuters. "Maybe the installers are concerned, but without EU measures we would see a Chinese monopoly and monopoly prices."
The Commission will send questionnaires to the Chinese exporters as well as to EU producers and importers and make a recommendation to EU members. Any duties must be imposed within 15 months of the opening of the investigation and are generally kept in place for five years.
($1 = 0.7935 euros)
Reporting by Philip Blenkinsop in Brussels; Additional reporting by Chris Buckley in Beijing; Editing by Robert Birsel and Hans-Juergen Peters