It has long been an article of faith that Asian stock markets don’t merge.
The failed tie-up between the Singapore and Australian stock exchanges was met with a region-wide chorus of “I told you so”; it was the first obvious failure of Magnus Böcker, who had previously managed nine mergers, not only within Europe but across oceans.
There is just too much national pride in Asia, and not enough EU-style integration, for mergers of nationally iconic stock exchanges to take place.
What to make, then, of Shanghai Stock Exchange’s letter of intent to buy up to 40% of the Pakistan Stock Exchange (PSX)? It makes more sense than one might at first imagine.
To deal with the politics first, Shanghai won’t be getting a majority stake no matter how much it takes on, though there’s no question there will be some objection from Pakistanis already nervous that One Belt, One Road will make their economy beholden to China.
However, you can see why Shanghai would want to do it. During the past two years, Pakistan’s economy has started to look like it used to a decade ago under the reform and privatization process that ex-Citibanker Shaukat Aziz drove while serving under president Pervez Musharraf.
Most of the years since have been mired by violence and corruption, but better times are clearly arriving. Pakistan is on good terms with the IMF, has been upgraded by Moody’s, and has been put in to the MSCI Emerging Markets Index rather than its junior frontier counterpart.
Tangible evidence
From a stock market perspective, not only has outright performance been good, so have volumes: by October 3 the 90-day average daily trading volume on the PSX was up more than 60% this year, though it should be remembered that the PSX has only technically existed since January, being a merger of the exchanges of Lahore, Islamabad and Karachi.
Also, Pakistan is possibly the one place in the world – China included – where one can point to tangible evidence of the One Belt, One Road initiative creating infrastructure, economic stimulus and jobs.
In the port of Gwadar, where China runs a free trade zone and hopes to make the deep-water port a central part of its Silk Road ideal, a highway is under way to connect the port, on the south coast on the Arabian sea, with Pakistan’s far north and ultimately through the Himalayas to Urumqi.
From the port, Chinese goods will go by sea to the Middle East, Europe and the Americas, while Chinese imports can come in the same way.
Additionally, Shanghai is not what it was. At various times during the past 10 years, one could have called it the most vibrant and exciting stock market in the world, in terms of its trajectory and ambition. However, the A-share crash, and the botched efforts of the government to intervene to fix it, has done damage, and the IPO market has not yet recovered.
Buying Pakistan’s exchange stake won’t cost all that much, certainly not by the baffling standards of Chinese outbound M&A.
The only question is whether Pakistan wants to sell to China; Shanghai is only one of three shortlisted bidders, with a decision to be made by November – but wherever it comes from, Pakistan needs capital, and might benefit from seeing the Shanghai exchange not only as a part-owner but an ally.