In a lightly covered story this week, China decided to put some interesting restrictions on its solar industry. According to reports, the Development and Reform Commission and Ministry of Environmental Protection got their heads together and decided to put restrictions on poly Si expansion. This is an about face from the easy money China has provided to the solar industry for rapid expansion over the last few years.

Chinese solar companies like LDK Solar (NYSE: LDK), Trina Solar (NYSE: TSL) and Yingli Green Energy (NYSE: YGE) have all taken on cheap debt to build capacity. Now further expansion is put into question if the regulations are put into effect as reports suggest. The regulation also will limit new entrants into the solar market but gives a bit of leeway saying special permits may be allowed for "technological innovations, energy conservation and environmental protection."

The market hasn't reacted because this is a mix of good and bad for manufacturers. The fear for solar this year was a major over-supply in the industry so China is really doing the right thing if it wants solar companies to remain viable long-term. While it may help the industry as a whole maintain margins and stay profitable it isn't helping Chinese companies who want to expand and take market share. This may leave some opportunity if the regulations are kept in place too long.

U.S. solar companies get a boost
First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWRA) are the biggest manufacturers outside of China and could start taking back some of the market share Chinese manufacturers have taken in recent years. The longer there are restrictions in China the better it will be for these two manufacturers.

This is by no means a reason to be bearish on Chinese solar stocks. Most manufacturers still trade at very low earnings multiples and are continuing to cut costs, making solar a more viable form of energy. It will just be something to watch and listen to as management answers questions in upcoming conference calls.

The move to curtail solar expansion may be just what the industry needed to save it from self-destructing in a capacity arms race. Unlike the slow U.S. regulatory system the Chinese appear to be quick to react when conditions so when demand meets up with supply I hope China is able to react just as quickly.

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