Chinese Boost For Kazakhstan’s New Stock Exchange
Kazakhstan’s new stock exchange will play an important role in China’s attempts to expand into nearby capital markets, but is likely to struggle to attract liquidity from western investors, according to observers.
The Astana International Exchange, or AIE, will begin trading between October 2017 and January 2018, Kairat Kelimbetov, Kazakhstan’s former central bank head and now governor of the Astana International Financial Centre, told S&P Global Market Intelligence. The exchange is being established by the AIFC, which was signed into law by President Nursultan Nazarbayev in late 2015 and is aimed at developing Kazakhstan’s financial services industry and capital markets.
The new exchange, which would be Central Asia’s first international bourse, gained traction June 8 when the Shanghai Stock Exchange agreed to acquire a 25.1% stake, a move that came as China looks to expand its presence in Asian capital markets to boost its “Belt and Road” Initiative to export more goods to Asia and Europe.
Belt and Road drives Chinese interest
It was the second foreign investment by a Chinese exchange, following on from an $85 million deal in December 2016 in which the SSE and two other Chinese bourses acquired 40% of the Pakistan Stock Exchange. In addition to sources of infrastructure investment, China also seeks regional platforms on which to trade the yuan and yuan-denominated bonds from international issuers, known as “Panda” bonds. Globally, $19 billion of Panda bonds were sold in 2016, a figure that JP Morgan expects to rise 50% in 2017.
Although China’s investment will assist the AIE in setting up facilities and trading technology, which will be supplied through an agreement with NASDAQ, Kelimbetov said the exchange relies on successful flotation of several large state monopolies to build a sizable free float.
“Beginning in 2018 and 2019, there will be the privatization of three to five big companies, leading up to Kazatomprom,” which provides 40% of global civilian uranium exports, he said. This and subsequent IPOs, including national oil company KazMunayGaz, will likely be joint listings on the London Stock Exchange and the AIE, though Kelimbetov said a “significant part” of each listing would be on the AIE.
“Wheels are starting to turn, but it’s early days,” said a U.K. investment banker involved in the IPOs, who asked not to be quoted by name.
The first, he said, is likely to be flag carrier Air Astana, in the third quarter of 2018. BAE Systems will seek to exit a 49% stake it acquired cheaply in 2000, with the sovereign wealth fund selling some of its remaining 51%. Whether it can sell these depends upon local buyers for the shares, as Kazakh law requires the airline to be majority domestic-owned.
Liquidity, governance questions
Kelimbetov called the privatizations “quite radical,” but Western investors will be skittish about buying “minority stakes in blue-chip state companies” and will have concerns about corporate governance structures, said Moscow-based economics analyst Alex Nice.
The AIFC is the first example of an ex-Soviet country allowing for the use of English common law, and it will operate with an independent judiciary of British and other overseas judges, something done in an effort to allay such concerns, said Kelimbetov. Yet precise legal arrangements around ownership and dispute resolution remain unknown.
“Foreign investors are going to be very wary about committing significant amounts of capital until the full legal form is published and enshrined in law in Kazakhstan,” said a London consultant involved in the launch, who preferred not to be named. “This may be why Asian investors will consider investing in advance of Europeans, as the latter are more likely to ensure legal certainty is clear.”
Coaxing international investors to trade ordinary shares on the exchange will also be a challenge, with investors more likely to purchase depository receipts in London instead, the U.K. investment banker said.
“There is a general trend towards investors being willing to invest in local shares (they’ve been doing it for years in Turkey, and now in Russia it’s common as well), but it takes time in each market,” the banker said. In Moscow it took “many years of investments in infrastructure and continuous outreach to investors” before they began to invest with Russia’s securities depository, or local custodians, rather than through Euroclear, he added.
Those who are set up to trade ordinary shares in Moscow can also deal in 245 stocks, whereas Kazakhstan will have fewer. One possible solution, suggested Nice, could be a tie-up with the small Kazakhstan Stock Exchange, which is majority-owned by the central bank, started trading shares in 1997 and has 130 listings.
“It’s not clear how those two are going to interact,” he said, adding that the government has not yet explained “why do you need another one; why not expand the existing KSE, which is currently not very liquid?”
Putting the timetable in advance of the quality of the market structure risks backfiring in “reduced share prices, low liquidity and a reduction in the level of funds raised,” the consultant said, adding: “They would be better advised to do it right and take longer.”
Kelimbetov said the exchange is needed because “you can’t have a financial center without a stock exchange.” The existing Kazakh exchange is based in the formal capital of Almaty, which is roughly 1,000 kilometers as the crow flies from Astana, into which Nazarbayev has invested considerable resources and which is hosting a three-month expo that kicked off in early June.
S&P GLOBAL MARKET INTELLIGENCE, A PART OF S&P GLOBAL INC.