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Chinese investment into PSX a positive move

Pakistan’s economy has rebounded in recent years, with improving security across the country fueling economic growth. Pakistan was the world’s fifth highest-returning stock market in 2016, but the growth was driven by local investors, with the bourse eager to attract more foreign inflows. The market capitalization of the PSX is around $90 billion, although only about a quarter of that is freely tradable. Pakistan’s bourse was boosted last year when the country’s stock market was reclassified to be included in the MSCI’s emerging market index category. In December 2016, the average daily value of trades stood at about $200 million, doubling from December 2015, but some way below pre-2008 crisis levels, when daily trades reached $400 to $500 million.

The Pakistan Stock Exchange (PSX) has been on a consistently upward trajectory despite frequent fluctuations and jolts in progress. It is considered to be the best performing market in Asia and one of the top five in the world. The globalization of equity markets has led to increasing efforts by the world’s leading exchanges to diversify, expand and increase efficiency through demutualization and consolidation. Following this global trend, Pakistan’s three stock exchanges have also been demutualized, and last year they were consolidated under the name of Pakistan Stock Exchange (PSX).

Subsequent to demutualization and corporatization, the bidding for PSX’s 40% equity stake by local and international investors took place on December 22, 2016. Based on the results of the bidding process, the Chinese Consortium submitted the highest bid @ Rs28 per share and as a result is acquiring the 40% equity stake in PSX. The said Consortium comprises of three Chinese exchanges, i.e. China Financial Futures Exchange Company Limited, Shanghai Stock Exchange, Shenzhen Stock Exchange and two local financial institutions, i.e. Pak China Investment Company Limited and Habib Bank Limited. With 40% of the PSX equity already vested with the 200-strong stock broker fraternity, the remaining 20% would be offered in an initial public offering (IPO) to the general public. After the sale of 40% stake equivalent to 320 million shares, the enhanced value of PSX is $213 million up from original book value of $76 million.

This landmark achievement would not have been possible without the laudable efforts of the Government of Pakistan that enabled economic and political stability in the country to attract foreign capital for the said divestment process. Equally important, the Securities and Exchange Commission of Pakistan (SECP) played a pivotal role by providing appropriate regulations which served as an impetus in attracting foreign strategic investors. Improved stock market performance and changes in the operations and structure of the exchange over the last few years was also a strong reason for the success of the said divestment.

This is the first such sale of its kind in the region and it is expected to impact the PSX positively. The divestment brings about an ideal partnership for development of the capital market in Pakistan. The arrival of Chinese investors will be another step in fostering economic development in the region. It would add value to and help in index trading, new product and possibly cross-border listings. On the micro level, the sell-off would result in significant liquidity generation among stock brokers that was expected to result in their higher capital adequacy. On the macro level, divestment will result in institutional shareholding, experienced ownership and good governance for PSX which will translate into organized and robust development of the exchange. It would also help in reducing conflict of interest, strengthening of governance and new product development and opportunities for technological partnership.

PAKISTAN STOCKS TAKING LEAD AMONG CHINA, INDIA

In its recent report Forbes reported that Pakistan stock market business volume has jumped 20 percent in last 12 months and 400 percent increase was witnessed in Pakistan exchange trade funds in last five years that helped PSX to grab top rank leaving Indian and China behind on points table.

Pakistan’s soaring stock exchange will introduce derivatives trading from the middle of 2017. The PSX also plans to launch infrastructure bonds which would be predominantly used for the China-Pakistan Economic Corridor (CPEC) project. Brokers and analysts foresee the benchmark index at 55,000-60,000 points by December 2017.

Despite its positive performance, the PSX needs new avenues of growth and it is hoped by market analysts that its divestment to additional shareholders will bring the much needed innovation. At present, the market does not have an international outlook and does not function at the same level as some of the other top stock exchanges in the world. In order to become a more mature market that is attractive to big international players the entry of a strategic partner was a necessary move. The choice of a Chinese Consortium makes sense given China’s long-term interests in Pakistan’s economy. Only time will tell? whether these promises of growth and innovation will prove true.

Some may argue that letting China take a key stake in PSX is akin to putting all your eggs in one basket. There should be diversity, and Pakistan must balance Chinese influence with that from the West. However, the reality is that the West hasn’t been putting the money where their mouth is, and given the geopolitical headwinds and the rise of global terror, the West isn’t too keen to invest too much in Pakistan in any case. In the meanwhile, the growing Indian influence around Iran, Afghanistan and Central Asia is leaving Pakistan with no option but to woo China, which is the balancing and indeed the driving force in the region. Thus, timing wise this is indeed an opportune moment to invest in PSX which effectively represents the capital market of the country.

Beyond the broader dynamics noted above, the CPEC (China-Pakistan Economic Corridor) initiative is a very specific factor that is expected to positively impact the capital market both directly and indirectly. Therefore, from the strategic investors’ perspective investment into PSX is indeed an attractive proposition.

In conclusion, the divestment of the strategic stake in PSX is a milestone development for the Pakistan capital market and heralds a new era of development and growth of this important plank of the country’s financial sector. At the same time, this transaction demonstrates the increasingly close economic and financial relationship between Pakistan and China.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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