Chasing the Chinese Dragon - should investors buy into the China story?
FT Money Show presenter Claer Barrett and guests discuss whether investors should buy into the china story, how to get compensation for cancelled Ryanair flights and how solar panels work in practice.
Presented by Claer Barrett. Produced by Lucy Warwick-Ching. Edited by Paolo Pascual.
Chasing the Chinese dragon. Should investors buy into the story of China's growing consumer economy? Or do they risk getting burned? James King, the FT's China expert, joins me to discuss. If Ryanair has grounded your holiday plans, how can you get compensation? And how solar panels proved profitable ray of sunshine for the FT's money mentor, Lindsey Kirk. Welcome to the money show, the FT's weekly podcast about personal finance and investing. I'm Claire Barrett, FT money editor, bringing you this week's money news.
Two years ago, worries about the health of the Chinese economy sent tremors around the globe. Share prices tumbled as traders fretted not just in Asia, but in US and European stock markets, too. But this year, fortunes appear to have changed. Chinese equity funds have been the best performing asset class for UK investors the year to date, and fund managers are increasingly attracted to China's growth story.
But could they get to be singed by the dragon? I am joined by James King, the FT's emerging markets editor, and Amy Williams, FT money reporter. Morning, both. Starting with you, James. The two things that excite you the most about China are the fast growing consumer economy, and also its tech sector. Tell us why.
Yes. I mean, you mentioned the dragon metaphor, but I tend to think of the Chinese economy as more of a kind of chicken licking play. Because basically, what investors are worried about is whether the sky is going to fall. Two years ago, as you mentioned, and even at the end of last year, a lot of them thought it would. Now, very few of them think it will. And that allows people to really concentrate on some of the really big changes underway in the Chinese economy.
The main one is the shift from the old economy to the new economy. The old economy, of course, is mining, steel, utilities, real estate, oil and gas heavy industry, all of those good things that powered China for most of the last 30 years. But now, we've got a really new reality emerging-- healthcare consumer, education technology. And what we've seen lately is that those new sectors are taking up about 40% of Chinese total company earnings now, versus about 25% just in 2011.
So there's a really big shift going on. And it's those sectors, I think, that are showing particularly interesting opportunities, mainly because the real estate sector is now definitely slowing down. And the old economy is driven by the real estate sector. And when the real estate sector slows, the old economy tends to suffer relative to the new economy. So that's my basic thesis. That's why I think tech and consumer companies are really interesting.
Now, you told me a fantastic statistic last night when we were talking about what we'll talk about on the podcast concerning battery companies.
So there are lots of amazing facts when it comes to the Chinese technology sector. One of them is Alibaba, which, as everybody knows, is the online retail company. This company now has more customers than Amazon and eBay put together. There's a city in central China called Hangzhou which is almost now entirely cashless. It's absolutely no exaggeration to say that the smartest consumers in the world are in China. It's all digital money. It's all smart washing machines, smart fridges, smart phones, smart everything.
Smart toilets, I've seen on the internet.
Smart toilets. You can even have a water heater in your shower which plays classical music. It brings a whole new sort of meaning to singing in the shower. But the thing I told you the other night about batteries and electric vehicles is that people reckon that because there are so many lithium battery manufacturers based in Shenzhen-- in fact, there's a little index of them. 53 altogether are listed on the Shenzhen stock market that have been doing incredible this year.
But because this is now almost the world centre of battery technology, we're finding that battery costs are falling so quickly that people reckon-- and I quoted Moody's in a recent story-- that by about 2020, 2021, maybe 2022, the cost of electric cars will come down to a level that allows them to become mass market, about $20,000 US. And this is just one of the really amazing possibilities, I think, in the future for Chinese manufacturing.
Fantastic. Thanks for giving us such a robust macro picture of the Chinese economy. So Amy, turning to you now from an investment point of view, are the fund managers broadly agreeing with the picture James paints?
They're very much agreeing with this picture. And they've spotted a huge opportunity for active stock picking in China. There are so many companies. It's such an enormous market that they are almost looking for the next Alibaba, that these companies that we've already heard of, that's too late for the fund managers really focused on China. They want these fast growing, new tech companies. And so they're out there on the ground looking in the cities for the next few big companies. It's a very exciting, high growth area for them. And they are looking at tech and consumer companies.
And they're not very interested in manufacturing anymore. One fund manager told me that she completely sold all of her manufacturing associated companies around 2013. And it's just not something they're interested in anymore. So they're very excited about it. I mean, on a kind of more global picture, Goldman Sachs, the investment bank, did put out a report about a week or two ago where they said, actually, global and emerging market fund managers are still underweight China against the index. So they're still cautious. They are increasing their exposure. But the fund managers focused on China are very excited.
And of course, as investors, we have to look at the downside as well as the upside. So coming back to you, James, I mean, China's indebtedness is a worry for many investors. And there are also concerns about corporate governance and corruption, stories in the FT recently about CEOs going missing, and the power of the government, frankly, which has recently imposed capital controls on its citizens, which is having reverberations in the UK property market over here, affecting some big deals in London. So how much of a worry is that?
Well, I'd say it's a sort of constant worry. That's why I call it the chicken licking economy, because this debt issue is a big structural issue. It is not going to go away, and it hasn't gone away. What's changed over the last couple of years is that China has, as you mentioned, effectively regulated the capital account to such an extent that money is now no longer free to flow out of the country.
In the 18 months, to the end of last year, China lost about $1 billion US in outflows. This really panicked investors. They thought China's lost control. All the money's going to flow out. The renminbi's going to plunge. Therefore, Chinese equities are not attractive, et cetera. But the ability of the Chinese state, with 5,000 years of administrative history behind it, to shut off issues such as the leakage out of the capital account is very strong.
And because they've been able to do that, they've been able to alleviate people's concerns. But the debt issue remains, like a great sort of brooding, hulking beast within China itself. China's got about 260% debt to GDP ratio. That's mostly in the corporate sector. China's corporate sector is not only the most highly leveraged in the world. It's also the most indebted in the world. Corporate debt to GDP is about 170%, and there's a big shadow finance sector, which is completely out of control of the central government.
And therefore, things may blow up in that area. But the government, as I mentioned, is a formidable operator when it comes to control. And so far, they have a plan about how to whittle this debt down. And at the moment, the investors are buying it. But how long this will continue, when will the next shock occur-- those are always things that we don't know. And I wouldn't be surprised if, as the property market starts to trend down-- as I mentioned, it's already very clear that that's happening-- we might see nervousness return at some point over the next couple of years.
Well, thanks very much there to James King and Amy Williams of the FT. You can read FT Money's cover feature all about investing in China this weekend in the FT money section of the weekend newspaper, or online from Friday at ft.com/money, and it will feature many ways into the market for investors who are tempted to increase their exposure. FT Money is also hosting an ask me anything event on the evening of Wednesday, October 25 with our US investment columnist Ken Fisher of Fisher Investments.
Want to come? You can ask him about China or indeed anything else. Ping me an email headed "Reader Events" to firstname.lastname@example.org. We will send you the full details, terms, and conditions. Coming up later on the money show, how to get your money back if you've been left stranded by Ryanair. But firstly, as investors, we could all do with a ray of sunshine. Our money mentor columnist Lindsey Kirk says that sunshine has been her best investment and that installing solar panels on the roof of her home has really paid off. Welcome to the podcast, Lindsey.
So you reveal in your column this week that your initial investment of around 13,000 pounds in solar panels six years ago has been a real winner. How does it work?
Well, we had them retrofitted. It wasn't a new house at the time. And so we got the best rate for the feed in tariff. And we're now getting about 51 pence for every unit we generate. They reckon you can do up to 3,800 a year. Then you get a little bit more for the amount you export to the grid. That's about 5p per unit you export to the grid. So we're getting about 1,800 pounds a year tax free. And that's guaranteed for 25 years, and it's increased with inflation every April. So that's going up nicely. It started out at 44 pence when we started.
But the bigger thing now-- and I'm afraid I'm one of those people who keeps records-- the bigger thing is the electricity you save, because before we had the panels, my electricity bill, my monthly, evened out over the year, it was 104 pounds a month. Now, my combined gas and electricity together, six years later, is 104 pounds a month. My winter quarter, including the standing charges, was 157 pounds for electricity. I say I got records. And back in the summer of 2010, we would use 21 units of electricity a day. This summer, we use nine units a day.
Amazing. Good for the planet. Good for your wallet.
Good for the planet. Now, I work mostly from home, so I can, when the sun comes out, nip and put the dishwasher on or whatever.
Well, yes, this is what I really enjoyed about reading your column, how the weather affects the activity levels within your household.
But my machines also have timers on them. So you can set them if you-- and forecasts are pretty accurate, I would say.
So if the sun's out, then you'll have a roast dinner on a Sunday, put the washing machine on, put the dishwasher on, just go all out. But if it's a cloudy day, then less activity.
So does it still make sense for people to instal solar panels today?
The feed in tariff is a lot less. It was reduced really seriously in 2015. But you still would get about 250 pounds a year from the feed in tariff. And the cost of installing the panels is so much lower. It's less than half what we paid. The feed in tariff is only paid for 20 years.
So if you did it alone on the feed in tariff, you probably wouldn't do it, whereas when we were buying ours, the feed in tariff was sufficient to justify buying them. But it's the savings. If you are disciplined, it's better than a smart metre. Because everybody I know who's got panels knows what they use. And they know the best time of things to use it. They don't but washing machines and dishwashers on at midnight or whatever. This sounds probably sad. But if I have a dinner party, I put everything in the machine, but the next morning I put it on.
When the sun's come out?
When the sun's come out. And as I say, I reckon it is at least halving my consumption. Christmas week last year, we averaged 17 units a day, whereas before we had the panels, it was 26 to 30 a day in those sort of very heavy weeks. Now, that is roughly halving your electricity consumption.
Now, if you still your electric heaters blaring out all night, you're not going to make the savings. But if you are watching it and you use full loads for machines, et cetera, you can save money. And there is this virtuous thing as well. You're saving about two tonnes of carbon a year. And because it's inflation proofed and electric prices are going up, you are getting a better deal every year. What you calculate now, because we're doing far better than we thought we would, what you calculate now is probably going to be much better.
It will improve over time.
And also in your article, you've looked at the latest developments in generating technology within the home. What's next?
Well, as James said, batteries are coming way down in price. Ikea has started selling solar panels and battery packs. Those battery packs will work with already fitted solar panels. I did a quick check and found that I could get a battery that would, it said, make me 100% self-sufficient, but I can't see how that quite can be the case.
But for 5,700, you can then generate energy in the summer day and then use it in the evening. We see it all over the third world, where people have lamps and things in the evenings to do school work and office work. We can do that here. I probably will buy an electric car next time. My next door neighbour has one. He doesn't have solar panels. But if I can fill it up for free, why wouldn't I?
Fascinating. Well, harnessing the power of the sun for your car, your home, your dishwasher, and more. Thanks very much there to Lindsey Kirk, FT's money mentor columnist. You can read her article, Why Sunshine Has Been My Best Investment, online now at ft.com/money, or in the money section of the weekend FT newspaper. And hopefully, the sun will come out for us.
Finally, half term holiday makers will be dismayed by the news budget airline Ryanair is cancelling up to 50 flights a day for the next six weeks, blaming problems with staffing rotas. This will affect your travel plans, it says, of around 400,000 passengers. So if you're one of them, what can you do? Joining me now to discuss is Helen Dewdney, better known to her legions of fans as the Complaining Cow. And she's been growing during her hooves about the latest airline debacle. Welcome, Helen.
So second time we've had on the podcast this year after the British Airways debacle. This time, it's Ryanair. So first things first, how will people know if their flight is one of the cancelled ones?
Well, Ryanair have at last put up a list of all the flights, so that you can get that on their website. And they are saying that they were also e-mailing everybody, so watch your inbox.
So my flight's been cancelled. I've had the email, text message, or what have you. What are my rights concerning rebooking?
Well, Ryanair should be putting you on another soonest available flight. But the rules are saying that when there is a significant difference in the time that a reroute can be offered on the airline's own services, you can take another flight. But if you look at their terms and conditions, Ryanair says a significant time is three days.
Yeah, and another airline might say two. But I mean, I think myself and a lot of other people would say that that's far more than significant. So I think they'll probably look at it on a one to one basis and it will be up to you to try and negotiate through Ryanair, say I've found this other flight and that's what you're going to have to put me on, as well as giving me the refund. And I don't think we're really going to know what is significant until somebody tests it in court.
Well, indeed. And what about compensations? So there have in particular problems, as we say, for passengers informed cancellations at the last minute who have then rebooked on other airlines, but also things like hotel costs. If you have a three day delay, who's going to pick up the bill for that?
Well, I say cynically Ryanair think that the travel insurance will pay for it. But of course, not everybody takes that travel insurance. And already, one insurance company has said it will not pay for the consequential losses. And indeed, why should it? Because our premiums will then go up when they're paying up for all of this.
The consequential part, again, will have to be tested in court if they don't give it to you. But it's worth remembering that actually Ryanair is an Irish airline, so it would actually count as a cross-border court case, so you'd actually be taking it to court in Ireland. But it's not impossible. It's not difficult. But the compensation to which you are entitled depends on how long the flight is. But also it depends whether you have been notified within 14 days. If your flight is actually after that 14 days, you're not entitled to that EU compensation.
So say Ryanair tell me my flight, going on holiday at half term's been cancelled. And I've got to rebook on another service, another Ryanair service, let's say, and it costs more than my original flight. What would my rights be then?
Well, I think at the moment, again, that has to be tested. You should certainly fight for them having to pay for it, but you're not going to get it under the EU laws. So it's a case of, I think, sorting it out as soon as you can, because obviously other airlines are going to see this coming and put their prices up, which, of course, is another issue. But I would certainly be saying fight for it from Ryanair.
And so annoying that it happens at such a busy time of year, half term, and lots of people going on holiday.
Well, thanks very much there to Helen Dewdney, also known as the Complaining Cow. You can read more about this online on our website, ft.com/money. And it's well worth following Helen's blog, which has a special section at the moment on Ryanair, how you can complain, what to do about it, www.thecomplainingcow.co.uk. And if you have been affected by the Ryanair debacle, then get in touch with us. Our email address is email@example.com. We'd love to hear from you. That's it from the money show. To get in touch with our team of financial experts, email us at firstname.lastname@example.org, tweet us at @FTMoney, or comment on our articles online at ft.com/money. We will be back next week at the usual time. Goodbye.