Beijing‘s bet on Pakistan

Pakistan's transformation has not gone unnoticed by China's business-minded leaders.

Western investors tend to associate Pakistan with terrorism, says Shuli Ren in Barron's. Yet there must be more to it than that. Why else would China's "practical and business-minded" leaders pledge to invest $46bn in an infrastructure development scheme known as the China-Pakistan economic corridor? It's "by far Beijing's biggest bet on another developing country".

The Chinese have noticed that Pakistan is getting its act together. It was on the verge of a balance of payments crisis in 2013, but has impressed the International Monetary Fund with sound management and structural reforms. It has reduced overspending, cutting the budget deficit to 5% of GDP from 8% in 2012-13. It has cut expensive, inefficient electricity subsidies, beefed up tax collection and eliminated loopholes. Privatisation plans have also helped.

Lower oil prices, meanwhile, have seen inflation drop to a new low of 2.5%, from 8% last year, leaving scope for interest rate cuts. Growth is up from 3.7% in 2013 to 4.1% last year. And the country is safer fatalities from terrorist attacks hit a seven-year low last year.

Throw in cheap valuations a forward price/earnings ratio of around nine and Pakistan is "an undervalued reform story", says Renaissance Capital. Brave investors can access this small, volatile market with the DBX MSCI Pakistan ETF (LSE: XBAK).

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