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BRUSSELS (Reuters) - The European Union launched an investigation on Thursday into alleged state subsidies for Chinese solar panel manufacturers, intensifying a trade war between the two centred on the multi-billion dollar solar power market.
The EU's executive body is already studying Chinese "dumping" of solar panels, or deliberately selling products for less abroad than at home or at less than cost. It is the largest import sector it has ever targeted for such investigation.
The latest subsidy case followed a complaint by the EU ProSun group of 25 European solar panel companies led by Germany's SolarWorld, the same group that had complained of dumping.
EU Prosun says subsidies from Beijing made available only to local firms have stimulated production there to more than 20 times Chinese consumption and close to double global demand, and averted local bankruptcies.
Over the past week, China has lodged a complaint with the World Trade Organisation alleging Italy and Greece have illegally promoted domestic panel producers and warned it could put tariffs on EU exports of the raw material polysilicon.
The EU is China's biggest trade partner. For the bloc, China is second only to the United States. However, relations have been tense, with EU Trade Commissioner Karel De Gucht complaining China subsidises "nearly everything".
EU ProSun says Chinese solar panel makers have benefited from very low interest rates thanks to government policy, and if loans cannot be paid back they might be written off, extended indefinitely or paid off by government-controlled entities.
Chinese companies sold about 21 billion euros ($26.8 billion) of solar panels and components to the EU in 2011 - about 60 percent of all Chinese exports of the products and some 7 percent of all Chinese exports to the EU.
Chinese producers include Yingli Green Energy, Suntech Power Holdings Co Ltd and Trina Solar Ltd.
Trina says Chinese solar companies' cost advantages are due to their high levels of manufacturing leading to economies of scale, rather than any state subsidy.
While it produces photovoltaic modules at levels of over 1000 MW, many European manufacturers produce only in smaller levels of several hundred megawatts, it says.
EU ProSun says Chinese producers have reached a market share of more than 80 percent in Europe with the help of export subsidies, while a string of European solar companies, including former bellwether Q-Cells, have filed for insolvency.
Western solar firms have been at odds with their Chinese counterparts for years, alleging they receive lavish credit lines to offer modules at cheaper prices.
The EU imported goods from China worth a total of 292 billion euros last year. Imports of Chinese products subject to trade defence duties total less than one percent of that amount.
The United States late on Wednesday gave final approval to duties on billions of dollars of solar-energy products from China for five years.
While anti-dumping investigations and duties are relatively common, those concerning subsidies are not, because proving a 'financial benefit' from a government or public body can be harder and because anti-subsidy duties are typically lower.
Politically, subsidies are more sensitive because the investigation targets a country rather than just its industry.
The EU Commission can impose provisional duties within nine months. EU member states have within 13 months of the investigation's launch to impose definitive duties for up to five years.
($1 = 0.7840 euros)
Reporting by Philip Blenkinsop; Additional reporting by Ethan Bilby; Editing by Mark Potter