1. Chinese Firms Pick Up Equity on Pakistan’s Silk Road: Gadfly

Chinese Firms Pick Up Equity on Pakistan’s Silk Road: Gadfly

China's push into Pakistan is shifting from building highways and ports, part of the Silk Road link to the Middle East and beyond, to taking over some of the country's key companies.

By: | Published: October 19, 2016 12:59 PM
There's an obvious political element: Pakistan borders the other Asian giant, India, and the China-Pakistan Economic Corridor is key to President Xi Jinping's three-year-old Silk Road initiative. (Reuters) There’s an obvious political element: Pakistan borders the other Asian giant, India, and the China-Pakistan Economic Corridor is key to President Xi Jinping’s three-year-old Silk Road initiative. (Reuters)

China’s push into Pakistan is shifting from building highways and ports, part of the Silk Road link to the Middle East and beyond, to taking over some of the country’s key companies.

K-Electric market value

$2.4 billion

There’s an obvious political element: Pakistan borders the other Asian giant, India, and the China-Pakistan Economic Corridor is key to President Xi Jinping’s three-year-old Silk Road initiative.

But there’s investment logic, too, in plans to buy first into the country’s stock exchange, and now a power generator, K-Electric. China’s state-owned firms are acquiring revenue growth while they struggle with the slowdown at home.

The Shanghai Stock Exchange, the larger of China’s two main equity markets, has submitted plans to buy up to 40 percent of the Pakistan Stock Exchange, the Nikkei Asian Review reported early this month. Now Shanghai Electric Power, one of China’s largest utilities, is nearing a deal to acquire a controlling stake in K-Electric, with a market value of $2.4 billion.

An outright purchase of K-Electric, which serves more than 2.2 million customers in and around Karachi, would be the biggest acquisition in Pakistan for at least a decade and Shanghai Electric’s largest overseas purchase, according to data compiled by Bloomberg.

The interest in equity follows broader Silk Road investments by Beijing. They include a highway between Karachi and Lahore and a 923-hectare (2.28 million-acre) free-trade zone at the deep-sea port of Gwadar, part of the economic corridor that will give China access to the Arabian Sea.

As we’ve said, the Pakistan exchange is alluring for two reasons: It’s home to most of the country’s biggest companies; and it gives access to a market that was included in the much-followed MSCI Emerging Markets Index when China wasn’t. Plus Pakistan is among Asia’s best-performing markets this year, with the KSE100 Index up 25 percent.

K-Electric is growing a lot faster than Shanghai Electric. The company had net income of about $336 million in the 12 months ended March 31, up from $228 million the previous year, according to data compiled by Bloomberg. Shanghai Electric, which posted an almost 17 percent drop in first-half earnings, has been reporting profits below the peaks reached three years ago.

There’s no question Pakistan, and its companies, could do with China’s help. A $6.6 billion IMF loan that helped avert a balance-of-payments crisis three years ago came to an end last month. For all its growth, K-Electric is no stranger to the blackouts that cripple Pakistan’s economy, and cash infusions would be welcome.

Being on the hook to China could be costly, though. While Chinese-led investment has helped Pakistan’s economic growth accelerate to almost 5 percent, from an average of around 3 percent in the five years through 2013, the IMF says that repaying loans and repatriating profits to China could push outflows as high as 0.4 percent of GDP per year over time. Risks can run both ways: China might not be repaid, as it’s now finding with Venezuela, which still owes at least a third of the $60 billion or so it was lent in the last decade.

For now, it’s clear the benefits to both sides outweigh the risks. Expect Chinese firms to keep a keen eye on Pakistan’s corporate space.

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