The MT Diary

LSE's Istanbul connection; Cairo jitters; chav builders of Palm Island; saving for China

by Howard Davies

The World Cup was, of course, football for non-football fans, and they got what they deserved. I adopted a rigorous policy during the tournament of visiting only countries without a team in Germany. Turkey, Egypt and China seemed safe bets. OK, so I could have gone to Scotland. But since Gordon Brown turned into an English fan, I was worried about finding flags of St George on every Glasgow taxi.

For the Turks, the key point was that the Greeks weren't there, so the outcome was a matter of indifference to them. And they have many other more pressing concerns. Will the EU talk seriously to them about accession? Will the lira, on a roller-coaster ride recently, stabilise one day?

I was there to inaugurate a new Chair in Turkish Studies at the LSE. In the splendid new Istanbul Modern art gallery – named with more than a bow to the Tate – one felt much closer to Brussels than Baghdad, though that feeling may not be so strong on the borders of Kurdistan. But where do Europe's eastern frontiers lie? It's hard to say, and the Bosphorus may well not be the right answer. That is a question we think we should be engaged with over the next few years. It could turn out to be more important even than the implementation of the Market in Financial Instruments Directive.

If you find yourself with an evening commitment in Istanbul and a speech to make the following morning in Cairo, you can pick up the 23.50 Turkish airlines flight. Otherwise, I wouldn't recommend it, especially when it turns out to be two hours late and to deposit you in your Cairo hotel just after you need to get up.

The Egyptians were, however, less concerned by my sleep patterns than by the state of their stock market, which has fallen by some 40% since the turn of the year. Even so, it is still up on 12 months ago. Egyptian stocks have been among the raciest financial assets of recent years. If you read the brokers' circulars, you will find that stocks have been re-rated then de-rated again as investors have re-priced risk and spreads have widened.

Well, that's the explanation the analysts will give you. To the untutored eye it looks like irrational exuberance followed by naked panic.

Our Excellence, Sir Derek Plumbly, ensconced in the office from which Lord Cromer ruled the Nile and points south, is unperturbed. The fundamentals look good. The real economy has done well, with growth in the 6% to 8% range. The politics are stable. The Egyptians have acquired the habits of capitalism and seem unlikely to throw them off. So if you can live with a high beta, the alpha might be just fine.

Oddly, as I left for China the same evening , premier Wen Jiabao arrived in Cairo. I'm betting that his flight from Beijing was on schedule, unlike my connection in Dubai. Dubai airport is now a kind of Bluewater in the desert, where you (and the airlines) lose all sense of time and place.

Tattooed expat builders, fitting bathrooms for footballers on Palm Island, make the bars a series of no-go zones. There is a corner of a foreign terminal that is forever Essex.

 So it's a relief finally to reach the relative calm of Beijing, where more decorous behaviour is the norm. No swaying lager louts or half-naked chavs in the bar of the Intercontinental Hotel. Hang Em Hi of the capital's police force prefers it that way.

Once again I found China overheating, in more ways than one: Beijing is humid and oppressive in midsummer. The economy is again careering ahead at over 10% a year, with investment in particular hugely strong. The Chinese government is trying to persuade its population to spend, but the people are having none of it. The average household savings rate is around 45%.

With only a short experience of a booming economy, no pension safety net and only one child per family (in the cities, at least), it is perhaps not surprising that the Chinese are in- vesting for a rainy day. The consequences are a huge trade surplus and jumpy American senators complaining about dumping and exchange-rate manipulation.

Hank Paulson, the new US Treasury Secretary late of Goldman Sachs, will need to find a way of defusing the resulting tension. He has much experience on which to build. He told our students last year that while he was chairman of Goldman's he had visited China 65 times (he must have more pages in his passport than I have, or perhaps the Masters of the Universe don't need to mess with visas these days).

One thing that would certainly help is to persuade the Americans to save more – but that's as hard as getting the Chinese to spend. The US household savings rate is now around zero. Perhaps a population swap could be engineered, between Chicago and Shanghai, for example. That might restore one or two American airlines to profit and provide a use for all those Airbus superjumbos, if they ever get built.

In the meantime, I did my bit in Beijing – as I always do – by buying a pair of shoes in an indoor market. It's an exciting pastime, which involves being womanhandled into a stall and blockaded in until you have bought. At £25 a pair (I accept that I'm hopeless at haggling), it still seems worth it.

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