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Johnson Controls the Target of Chinese Regulators

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American battery manufacturer Johnson Controls (NYSE: JCI) is embroiled in a dispute with local environmental regulators over lead poisoning cases near its factory in Shanghai, China.

The local environmental regulators claim that Johnson Controls is responsible for an outbreak of lead poisoning in many local children. For its part, Johnson Controls says that the blame for the lead poisoning cases should be placed on a local recycling plant.

In its defense, Johnson Controls cited a study by the China Electric Equipment Industry Association that found that a nearby waste recycling facility was the source of high levels of lead in the area. The battery manufacturer said that its lead emissions were just one seventh of the maximum amount allowed under Chinese standards and that its battery manufacturing plant in Shanghai had been named a national model enterprise for occupational health and safety.

The local regulator has countered that the study conducted by the China Electric Equipment Industry Association is biased because the study was allegedly paid for by Johnson Controls. A claim that the China Electric Equipment Industry Association denies.

The dispute between Johnson Controls and local regulators comes at a time of increased friction between the United States and China. The latest furor began after the United States Commerce Department announced that it was opening an investigation into alleged dumping in the American market by Chinese solar power companies. The Chinese Ministry of Commerce quickly struck back with an announcement that it was investigating American programs that provided subsidies to domestic manufacturers of solar power equipment.

It's possible under this tense atmosphere that Johnson Controls is being used as a scapegoat for a local Chinese manufacturer's lax operations. If this is a case, it could be another example of how international companies often run into problems operating in China.

ACTION ITEMS:

Bullish:
Traders who believe that Johnson Controls is in the right and will prevail might want to consider the following trade:

  • Buy shares of Johnson Controls.

Bearish:
Traders who believe that the actions being taken against Johnson Controls are sign of things to come for foreign manufacturers in China may consider an alternate positions:

  • Protectionist policies will only get a country so far. If China is trying to regulate competitors out of business, the Chinese economy will suffer and it might even ignite a trade war. If tis scenario plays out, the Direxion Daily China Bear 3x Shares (NYSE: CZI) could climb higher.

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