A consortium of Chinese companies has bought out 40 percent strategic shares in Pakistan Stock Exchange (PSX) in December, last month. The significant feature of the deal lies in the fact that it is the first such sale of strategic interest in a bourse in the regional markets. Through the deal, the Chinese bourse has also made its first foray in an acquisition outside China. 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 and Pakistan as China is already taking a huge investment in Pakistan under China-Pakistan Economic Corridor, which cost $46 billion. This deal is also likely to boost Pakistan’s market with the introduction of Chinese capital, technology, experience and financial products.
Under the deal, a Chinese consortium comprises three Chinese exchanges — China Financial Futures Exchange Company Limited (lead bidder), Shanghai Stock Exchange and Shenzhen Stock Exchange will take up 30 percent of the strategic stock while two local financial institutions Pak-China Investment Company Limited and Habib Bank Limited will pick up 5 percent each, the maximum permitted to a single institution under the regulations. The consortium made the highest bid of Rs28 per share for 320 million shares on offer. The value of the transaction is calculated to be Rs8.96 billion ($85 million).
PSX sources had earlier revealed that Chinese and British consortia were in the running along with local banks without specifying them. This is the first time for Chinese companies to acquire shares of a foreign stock exchange. Another consortium of Chinese companies has been trying to acquire the Chicago Stock Exchange for nearly a year but it is facing resistance from a group of US senators. China is also trying to connect the Shanghai stock exchange with the one in London. It has recently connected the Shanghai Exchange with those in Hong Kong and Shenzhen.
After Chinese capital is introduced to Pakistan’s bourse, the market will be more internationalized and capital that flows to the country will likely to benefit the local economy and enterprises. Moreover, the investment will help broadening economic and financial collaboration between China and Pakistan and will help implement the One Belt and One Road Initiative and the China-Pakistan Economic Corridor.
The China Securities Regulatory Commission has made it clear that it supports the acquisition, and expressed the hope that the risks involved are within controllable limits. The 20 percent shares to be offered to the public would raise another Rs4.5billion. According to people familiar with the affairs, the entire proceeds from the sale of shares would be distributed among the 200 stock brokers in a certain determined ratio.Most brokers and market participants were of the opinion that the sale of controlling stock was justly priced. The market participants were of the opinion that divestment would add value to and help in index trading, new product and possibly cross-border listings.
PSX REMARKABLE JOURNEY
The Pakistan Stock Exchange (PSX) was formed in January 2016 when the Lahore, Karachi and Islamabad stock exchanges consolidated into one bourse. PSX was included in the emerging market index of the Morgan Stanley Capital International in June last year. 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 to the public and the remaining to qualified domestic financial institutions.
Pakistan’s bourse was boosted when the country’s stock market was reclassified to be included in the MSCI’s emerging market index category. Pakistan was dropped from the MSCI Emerging Markets Index when it imposed a floor on the market during the financial crisis in 2008, effectively trapping local and foreign investors for several months.
The PSX saw its benchmark index increased by 60 percent over the past year, making it one of world’s top performing indexes. 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.
In December, 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-$500 million.
Over the past few years officials have been enacting market reforms to regain the trust of investors, including demutualising Pakistan’s bourses to weaken the influence of stockbrokers and deepen the investor base.
With 40 percent of the PSX equity already vested with the 200-strong stock broker community, the remaining 20 percent would be offered in an initial public offering (IPO) to the general public.
This divestment will bring an excellent partnership for development of the capital market in Pakistan. The arrival of Chinese investors will be positive step in developing economic and social development in the region.
The sell-off would result in substantial liquidity generation among stock brokers that was expected to result in their higher capital sufficiency.
Pakistan’s soaring stock exchange will introduce derivatives trading from the middle of 2017. The introduction of derivatives, as well as plans for listing of infrastructure bonds, will boost liquidity in the market and lure foreign investors.
Pakistan’s economy has greatly recovered in recent years, with improving security across the country fuelling economic growth. Sentiment was further encouraged by China’s plans to invest $57 billion in a network of roads, railways and energy infrastructure across Pakistan.
The introduction of derivatives would help drive profits. Derivatives would bring in more liquidity in the market which is good for exchange business because trading activity generates trading fees.
Pakistan hopes that the Chinese bourses will boost Pakistan’s small corporate debt market, which has struggled to gain purchase as Pakistani companies continue to turn to banks for loans.
Considering the divergence in social systems, culture and language among the route’s countries, closer financial ties would clear up misunderstandings of the project.
The deal will stabilize 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.
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
Pakistan’s economy has rebounded in recent years, with improving security across the country fuelling economic growth. Pakistan’s market reform has been accelerating in recent years and the country has received backing from global institutions and overseas capital, making PSX more appealing to global investors than before.