China’s Pakistan bourse stake to boost ties



A Chinese consortium led by three Chinese exchanges is slated to acquire a 40 per cent stake in the Pakistan Stock Exchange (PSX) for 28 rupees ($0.27) per share, valuing the stake at 8.96 billion rupees. The three exchanges – China Financial Futures Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange – will take a combined 30 percent, while the remaining 10 percent will be halved between their local partners – Pak-China Investment Company and Habib Bank.

The Karachi-based PSX is currently the only stock exchange in Pakistan which was created in January 2016 following the merger of the Islamabad, Karachi and Lahore exchanges. Back in January 2015, at the start of the corporatization, Pakistan decided that the exchanges would offer no higher than 40 percent of their shares to international investors, no less than 20 percent of the public and the remaining to qualified domestic financial institutions.

The acquisition marks the first time that Chinese exchanges have bought stakes in a foreign bourse. It’s envisioned that the deal will further strengthen economic and financial cooperation between China andPakistan. The deal is also likely to boost Pakistan’s market with the introduction of the Chinese capital, technology, experience and financial products, and ready the Pakistani equity market for the launch of financial derivatives, such as futures and options, a Chinese expert said in an article in Global Times.

The stake purchase also indicates China’s first investment in stock trading platforms in the countries along the Belt and Road route, a conspicuous sign that China’s efforts to implement the initiative have reached the equity market sphere. The logic behind the move consists of three aspects.

First, the PSX stake acquisition will enhance understanding of the Belt and Road initiative among countries along the route, as financial cooperation is indispensable to the initiative. Considering the divergence in social systems, culture and language among the route’s countries, closer financial ties would clear up misunderstandings of the project. As the global economy has become progressively integrated, finance has turned out to be a common “language.”

As such, the deal will stabilise and develop financial markets along the route. China could draw on the experience of its two stock connect schemes that link Hong Kong to Shanghai and Shenzhen and replicate the model to enable closer equity market ties between China and Pakistan.

Second, the deal could change the way funds are collected across borders and lure in more capital for projects along the initiative. Infrastructure projects alone along the route are estimated to require hundreds of billions of dollars, a feat China can’t push singlehandedly.

Pakistan received approval to be included in MSCI’s Emerging Markets Index in June, and it is forecast that after the reclassification officially takes effect in May 2017, hundreds of millions of dollars will flow intoPakistan’s market. Chinese companies investing in Pakistan also need to raise funds in the local market. The Chinese consortium presence in the PSX will attract more capital from Pakistan and abroad to fund the initiative directly and indirectly.

Third, the deal will lay the groundwork for the creation of national and regional exchanges in countries along the route. For example, Kazakhstan needs to create stock exchanges, and a new regional exchange – the Kunming Silk Road Stock Exchange – is being proposed to finance infrastructure projects in China, South Asia and Southeast Asia. The PSX stake acquisition will lend Chinese bourses experience in forming new exchanges along the route as well as push forward China’s financial and equity market reform.

Certainly, there are a few issues that deserve immediate attention, the Chinese expert noted.

Will Pakistan receive tangible benefits from China’s investment? After Chinese capital is introduced toPakistan’s bourse, the market will be more internationalised and capital that flows to the country will likely to benefit the local economy and enterprises. Additionally, more Chinese-funded financial institutions will enter the market, stock transactions will be boosted and the government’s stamp tax will rise. Listings and transaction cost will also multiply. But how can Chinese investors ensure that small and medium-sized financial firms and the overall population will benefit?

If only Pakistan’s government and large firms reap the gains, small firms will fall the prey to stock market internationalisation. This is certainly not what Pakistan’s government and citizens are looking for, and such a result would be undesirable.

Further, will the investment from China channel the inherent problems of the A-share market into the thePakistan stock market? Regulations, corporate governance and investors’ opinions on value differ considerably between the two markets. The countries also differ in terms of improving investors’ knowledge, allowing their stock markets to develop, achieving rational valuations and attracting professional investors.

To bridge these differences, China needs to align domestic and Pakistani investors in concept and culture while not transferring problems of the A-share market to Pakistan.

Despite these challenges, Chinese investment in Pakistan’s stock market will serve as a model for financial cooperation between China and other countries along the Belt and Road route.

Courtesy: Global Times