UPDATE 1-Solar shares rally on new Chinese subsidy

(Adds confirmation by Chinese government in first sentence, other details)

NEW YORK, March 26 (Reuters) - Shares of solar companies rallied sharply on Thursday after the Chinese government said it would launch a generous new subsidy for the clean power systems.

Chinese-based companies were the biggest gainers, with Trina Solar Ltd TSL.N up 40 percent at $12.14 per share, Suntech Power Holdings STP.N, up 40 percent at $10.96, LDK Solar Co LDK.N, up 36 percent at $8.00, Yingli Green Energy YGE.N up 39 percent at $5.75, Solarfun Power Holdings SOLF.O up 26 percent at $4.48 and Canadian Solar CSIQ.O, up 23 percent at $5.95.

Those shares had been hard hit so far this year as financing for new solar projects dried up, but the news that China would move to support the industry spurred hopes that the government could open up a potentially huge market for the industry.

“This is a pleasant bit of news out in what has been a quite bleak time for the solar industry. The numbers are quite substantive,” said Edward Guinness, co-manager of the Guinness-Atkinson Alternative Energy Fund which owns shares in several solar companies.

According to a statement on a Chinese government website, solar projects larger than 50 kilowatts of output will be eligible for a subsidy of about $2.90 per watt.

“We believe meaningful upside potential exists if government support for domestic solar sector continues,” a Barclays analyst wrote in a research note, adding the move could boost Chinese demand by about 200 megawatts starting in the second half of 2009, a nearly four-fold increase from Barclays’ projection for this year.

China is home to several solar power companies, but most of the sales are to Germany and Spain, the two largest markets in the world. The United States is the third largest market.

The crisis in financial markets has shut off much of the funding for new projects since late last year, while weakness in the euro versus the dollar has eroded profit margins for companies that sell into the European market.

One analyst said while the news was clearly positive for the solar sector, many details had yet to emerge.

“Although the subsidy may cover about 60 percent-plus of the cost of installation, it is unclear how much the energy generated from the system will be valued,” Piper Jaffray analyst Jesse Pichel said in a note to investors.

The news also boosted shares of U.S. companies First Solar Inc FSLR.O by 14 percent to $152.96 per share and SunPower Corp SPWRA.O by 15 percent to $27.66, while Germany's Q-Cells QCEG.DE rose 21 percent to 18 euros and Norway's Renewable Energy Corp (REC) REC.OL gained 18 percent to 58.40 crowns. (Reporting by Matt Daily and Wanfeng Zhou in New York and Nichola Groom in Los Angeles, editing by Matthew Lewis)