While signing of the Sale and Purchase Agreement (SPA) of 40 percent strategic equity stake of Pakistan Stock Exchange (PSX) with a Chinese consortium, recently, the Finance Minister Ishaq Dar called the deal a dream come true. Last month, a Chinese-led consortium consisting of China Financial Futures Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange and two local firms, took a 40 percent stake in the business. A delegation from the Chinese-led consortium formally signed documents for the takeover of PSX with Pakistani authorities. The consortium had won by placing the highest bid of Rs28 per share for 320 million shares at the total price consideration of Rs8.96 billion ($85m) when the stake was put on the table in December 2016.
With the purchase of stake in PSX, the Chinese bourses are expected to help develop the latest technology and trading systems in the PSX. Local observers believe that the partnership with the Chinese consortium would be crucial in bringing the governance and regulatory structure of the PSX on a par with global standards. The benchmark PSX index witnessed 60 per cent rise over the past year, becoming one of world’s top performing indexes. Chinese investment in PSX will help broadening economic and financial collaboration between China and Pakistan and bring experience, technological assistance and new products in the country’s market.
Critics, however, contend that acquisition of 40 percent would mean to handover the management control of the stock exchange’s core operations to the Chinese-led consortium. Was this the Dar’s dream that came true?
MAJOR ROLE OF GOVERNMENT
The PSX was the world’s fifth highest-returning stock market in 2016. Though the government has an important role to play in shaping the legal, institutional and business environment but major responsibility rests with the corporate sector to achieve a higher level of corporate governance. The high standards of corporate integrity and excellence are of key importance for the development of any capital market.
The PSX which was formed in January 2016 after Lahore, Karachi and Islamabad stock exchanges consolidated into one bourse. The merger of Karachi Stock Exchange (KSE), Islamabad Stock Exchange (ISE) and Lahore Stock Exchange (LSE) is expected to prove beneficial for the growth and development of the country’s stock market. It helps strategically focus Pakistan’s developing capital market including expanding the investor base. This has also enhanced governance and transparency of the capital market.
Last year, the country’s stock market was reclassified to include in the MSCI’s emerging market index category. The country was dropped from the MSCI Emerging Markets Index when it imposed a floor on the market during the financial crisis in 2008. The flooring trapped local and foreign investors for several months. The liquidity in the market got a boost last year with the MSCI’s announcement.
The average daily value of trades stood at about $200 million in December 2016, which was almost double from a year ago. Since 2008, the market witnessed different reforms including demutualization in order to regain the trust of investors and deepen the investor base. Under the divestment policy, the PSX would now offer another 20% (160 million) shares to the general public within six months of the completion of acquisition process by the strategic investors.
The interest of the Chinese government and investors to launch various development and infrastructure projects in Pakistan has been supporting the positive sentiments in the stock market. The PSX plans in the mid of this year to launch infrastructure bonds which would mainly be used for the $47 billion China-Pakistan Economic Corridor (CPEC), a game changer project. Listing of infrastructure bonds are part of efforts to boost liquidity in the market and lure foreign investors, according to Nadeem Naqvi, managing director of PSX.
China’s plan has further buoyed the sentiment in the market as Gwadar port is essential part of the CPEC, which involves construction of highways, railways and energy pipelines connecting western China with Pakistan and the Persian Gulf. The two countries signed 51 deals worth billions of dollars mostly relating to the CPEC project. No doubt, a huge investment in infrastructure sector promises a brilliant economic future for the development of the country. After construction of the proposed rail, road and pipeline projects between China and Pakistan, Gwadar port will handle most of the oil tankers to China. In the present age of globalization, Gwadar has greater scope and tremendous potential to emerge as distribution and logistics hub in the region.
Pakistani government has already declared Gwadar port a free trade zone for the next 23 years. A huge development process is underway in and around Gwadar to convert it into a new Dubai, Hong Kong or Singapore in the subcontinent.
Prime Minister Nawaz Sharif already said that Gwadar port would be developed on the pattern of Hong Kong, which is a model as to where the financial successes of Asia are headed. Being the builder, operator and financer of Gwadar port and also being the biggest investor in the port city, China can play the role of a major driver of growth in Gwadar as it did in Hong Kong. Having a free market economy, Hong Kong is highly dependent on international trade.
China’s share is over 35 percent in international trade. Strategically located Gwadar port can be converted into a regional hub of international trade. By virtue of its geography, Gwadar has greater potential, wider scope and brighter prospects to emerge as center of trade and commerce serving at least 20 countries in the Asian region. China is deeply interested to pour huge investments in Gwadar, which is located at the mouth of the Gulf and close to the Strait of Hormuz.
The law and order remained a major area of concern in various parts of the country, which adversely affected the capital market and at some point it reached near a breaking point, but bounced back within a week at some occasions.
Experts believe that after Chinese investment, the capital market would sustain its position as one of the top performing market in Asia, and also advocate for strengthening the monitoring and enforcement regime by introducing structural reforms. However, a vibrant economy needs incentives and tax relief for local and foreign investors.