A number of subscribers were electrified by the sudden boom in Chinese solar energy stocks late last week. Badly depressed companies like Suntech Power (STP), First Solar (FSLR) and Yingli Green Energy (YGE) jumped overnight by as much 50%.

What happened? Some stock analysts clearly overreacted to a report on the Chinese Finance Ministry's Web site which indicated that the government will offer a sizeable subsidy for the cost of installing solar arrays. That's almost all of the detail that was provided. Certainly it was not enough to justify double-digit gains in every Chinese stock remotely related to solar energy.

Buying into this overnight sensation almost guarantees investor losses unless substantially more satisfactory detail is revealed by Beijing. Some of the details that are missing in the subsidy plan include the conditions to qualify for payment and exactly what kind of installation will be included in the plan. Also missing is the timing of the government's payment of the subsidy and exactly how many years this program will last. Investors simply can't know which companies will benefit and by how much without this kind of detail from Beijing.

What we do know is that the Chinese government announced a 20 yuan per watt (approximately $2.93 per watt) subsidy for solar energy. But only 2.5 billion yuan have been allocated for the program. That amounts to a relatively underwhelming $366 million, an amount which may provide a one-time boost for the industry. The size of the subsidy implies the government will only support 180megawatts (MW) of installations and that's not a huge increase relative to the size of the industry.

In order to gauge the importance of the subsidy from an investment perspective it's important to compare the size of the program to the size of the industry. Many Chinese solar panel makers, and there are approximately a dozen of them, produce more solar products in a year than the entire subsidy plan will be responsible for. For instance Trina Solar shipped 201MW of products in 2008 and Yingli Green Energy shipped 281MW last year. An industry-wide boost of 180 MW is relatively small by comparison.

We feel the market has overreacted to the Chinese stimulus plan. Even shares of First Solar jumped approximately 13% on news of the China stimulus plan. But First Solar is an Arizona-based company and is highly unlikely to gain directly from a plan that is almost certainly intended to assist Chinese firms. It's also worth noting that First Solar produces a billion watts of solar energy products annually. Even if the Chinese subsidy did apply to First Solar it would only cover 15% of First Solar's entire output.

In short, this sudden boom in solar stocks has the makings of a mini-bubble. From an industry-wide perspective, solar companies both in China and the western hemisphere are facing pricing pressure because of overcapacity and falling polysilicon prices. Chinese companies and their North American, European and Asian competitors are all facing big slides in prices for the solar cells and panels they produce.

Perhaps more generous U.S. solar incentives will eventually help stabilize prices and reduce the build-up of inventory throughout the silicon solar panel supply chain. The reality of the industry is that solar power is more expensive than conventionally generated electricity and the industry is entirely dependent on government subsidies to make solar power an economical alternative. The Chinese subsidy by itself is not enough to revive the industry.

For the time being we expected solar energy stock prices to drift back to their somewhat depressed pre-stimulus values. Analysts worldwide have now cast doubt on the Chinese stimulus plan, and without investor confidence share prices are likely headed one way: down.