China announced this week that it will begin banning the development of new solar panel manufacturing facilities that simply add capacity.

The Chinese Ministry of Industry and Information Technology made the public announcement on its website Tuesday.

The move, analysts say, is expected to drive a flurry of merger and acquisition activity in the sector, as well as increase the competitiveness of Chinese solar manufacturers.

Top tier Chinese solar company stocks responded positively to the news, with players like Yingli and Canadian Solar rising slightly. It's interesting to note, however, that Chinese solar stocks did not respond quite as positively as Taiwanese solar stocks such as Neo Solar Power Corp., which saw its sharpest one-day spike since June following the announcement.

While China might limit new capacity, Taiwan has no such constraints and will likely benefit from reduced competition from Chinese manufacturers, analysts suggest.

The move from the Chinese Ministry of Industry was initially a surprise.  To many, however, the annoucement seemingly provides for the long-term health of an industry in which the Chinese government has invested in heavily.

Overcapacity caused solar panel prices to plummet 20 percent in 2012 according to an article published by Bloomberg. And presently, existing solar manufacturing capacity in China is far greater than necessity.

If Chinese solar manufacturers operated at max capacity, they could produce 49 gigawatts of solar panels a year, according to Bloomberg. That’s 61 percent more solar than was installed globally in 2012.

A report from Lux Research found that the move to limit new solar capacity demonstrates China’s dedication to its solar industry.  It also stated that China will increase it domestic demand for solar, using up more supply locally.

The report went on to say that China would encourage acquisitions that will leave top-tier companies to gobble up smaller ones.  And that China would invest more heavily in research and development, which will keep manufacturers globally competitive.

These predictions are playing out in the Ministry of Industry’s recent announcement.  The government, in addition to limiting new capacity, will require solar manufacturers to spend at least 3 percent of their annual revenue on research and development, as well as new or upgraded equipment.

While additional solar manufacturing capacity will be limited, it won’t be impossible for Chinese manufacturers to add it.

“They may be able to add capacity without actually building it,” said Angelo Zino, an analyst with S&P Capital IQ told Bloomberg. “The Chinese government would be more than OK with companies if they joined forces or capacity gravitated toward the tier-one manufacturers.”