NEW DELHI -- The Shanghai Stock Exchange has submitted a letter of intent to buy a stake in the Pakistan Stock Exchange, The Nikkei Asian Review has learned.
The Chinese market operator intends to buy a stake of up to 40% in the PSX.
If it goes through, the acquisition would be the first by a Chinese stock exchange of a foreign bourse.
The PSX was formed in January by consolidating the Lahore, Karachi and Islamabad stock exchanges.
Ayyaz Afzal, former CEO of the Islamabad Stock Exchange, discussed the letter of intent during an interview with The Nikkei Asian Review. Afzal currently serves as a director at the National Clearing Company of Pakistan, a unit under the Pakistan Stock Exchange. He holds other posts as well.
"Shanghai is one of two stock exchanges who submitted us letters of intent," Afzal said, also mentioning a bourse in the Middle East. Afzal also said the PSX could receive additional letters of intent by December, and "before March 2017, I think there will be some positive news about the strategic investor," he said.
A Shanghai Stock Exchange source told The Nikkei Asian Review, that "there is nothing we can say for now." The person did not deny that a letter of intent has been submitted.
Pakistan finds itself in the path of the Chinese government's massive "One Belt, One Road" initiative. If the stock exchange deal falls China's way, it could trigger large flows of private Chinese funding into Pakistan.
When the PSX was formed, it kept 40% of its shares in its own treasury. It now appears this treasury stock is to be sold off to form a capital alliance.
The selling price of the stake has yet to be determined, but the total assets of the Karachi Stock Exchange, the surviving post-merger company, came to 14.1 billion Pakistani rupees ($134 million) at the end of 2015. A total of 576 companies are listed on the PSX, with an aggregate market cap of slightly higher than 8 trillion rupees.
The Shanghai Stock Exchange last year agreed with Germany to set up an offshore exchange for yuan-denominated financial instruments in Frankfurt, hoping to attract more European investors.
But the possible Pakistan deal would mark the first time for a Chinese party to invest in an existing foreign stock exchange. It would also be a big step for China as it expands globally.
The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.
Beijing has long been keen to strengthen ties with Pakistan.
During a visit to the country in April 2015, President Xi Jinping pledged an unprecedented amount of financial support, thought to be $46 billion. The funding is to go to a project called the China Pakistan Economic Corridor, which is to run to the Pakistani port of Gwadar, along the Arabian Sea. The project, part of China's belt and road initiative, is to include construction of railways, roads and power infrastructure.
"I think [the Shanghai Stock Exchange] will be interested to buy [the entire] 40%," Afzal said, reasoning that China "certainly" now has closer ties with Pakistan than do other countries because of the economic corridor project.
Pakistan, the world's sixth most populous nation, is home to some 190 million people. Its economy in 2015 was the globe's 41st largest, at $270 billion.
That economy remains vulnerable and has recently been hit with declines in foreign direct investment.
For three years through September, the South Asian country received aid from the International Monetary Fund to overcome critical foreign reserve shortages.
In addition, tensions are escalating with India over Kashmir. India has blamed Pakistan for allowing terrorist bases on its side of Kashmir. India says some of these terrorists in September crossed the border and killed 19 Indian soldiers.
The situation has further isolated Pakistan, which appears to be warming to China.
"We very much welcome all the involvement of China, as it is now only China which helps our economic development," said a Pakistani staffer at the U.S. Agency for International Development in Islamabad.
Nikkei staff writer Yusho Cho in Shanghai contributed to this report.