Over the past year and a half, China has purchased strategic stakes in three stock exchanges at key junctures along the Belt and Road as it seeks to solidify its economic, political and financial relationships with their respective countries: Bangladesh, Kazakhstan and Pakistan.
It started with the Rs8.96 billion ($85.47 million) acquisition of a 40% stake in the Pakistan Stock Exchange (PSE) in January 2017. This was followed by the purchase of a 25.1% stake in Kazakhstan prospective Astana International Exchange (AIX) for an undisclosed sum six months later.
Most recently, China has acquired a 25% stake in the Dhaka Stock Exchange (DSE) for BDT9.9 billion ($119.22 billion) plus $37 million in technical support. This deal received final regulatory approval from both countries in May this year.
When it came to bidding, the China Securities Regulatory Commission (CSRC) wisely created a consortium to prevent domestic exchanges from competing against each other. Post-acquisition, it has split product development between them, with the China Financial Futures Exchange taking the lead in Pakistan, the Shenzhen Stock Exchange in Bangladesh and the Shanghai Stock Exchange in Kazakhstan.
Together the acquisitions are the capital markets equivalent of China’s Belt and Road infrastructure investments. Or to adapt a favoured analogy: they are like a jade bracelet circling the mainland in the same way China’s port investments are a string of pearls across the Indian Ocean.
The Chinese believe that jade’s intensity mirrors the health of the person wearing it, since it is conduit for energy flows (qi) between the two. A luscious shine denotes good health, whereas a dull or flat colour indicates illness.
So far, the acquisitions have caused few negative vibrations. The Indians are not happy at losing out in Bangladesh and Pakistan’s once dominant brokers are still getting used to the fact their power is waning following demutualisation.
One thing the Chinese investments will progressively change are the information flows — or as local newspapers more aptly call them, information leakages. Higher average daily trading volumes, geographically wider investor participation and new IT systems will make it far more difficult to ‘play’ the market.
China’s influence is likely to have the most impact in Pakistan, where average daily trading volume stood at $81 million during the first quarter. This is much smaller than the DSE’s $120 million level despite the fact the PSE is classified as an emerging market compared to the DSE’s frontier market status and has a much larger overall market capitalisation ($80 billion vs $39 billion).
Elixir Securities data shows there are now no Chinese institutional investors within the ranks of Pakistan’s top 100. Indeed, there are no truly Asian ones either.
The dominant forces are all ultimately American-owned – Franklin Resources, Templeton Asset Management and Vanguard Group. Local bankers believe this will start to change once a Chinese-listed exchange traded fund, or ETF, is listed later this year, most likely in Shanghai.
They hope it will quickly be able to scale up to the size of the New York-listed Global X MSCI Pakistan ETF, which now ranks as the PSE’s 21st largest institutional investor.
Bankers say the ETF is going through the Chinese regulatory approval process. They are also hopeful Pakistan will soon become an approved country under China’s Qualified Domestic Institutional Investor (QDII) scheme, which allows domestic financial firms to invest in offshore markets.
Bankers say the next step will be for Pakistani brokerages to forge closer links with Chinese ones, paving the way for the distribution of IPOs and blocks into China too.
“This should all act as a stepping stone to a formal stock connect linkage between the two countries and eventually cross-listings and Belt and Road IPOs,” said one Karachi-based banker. “It will transform our market.”
