H shares' weighting set to rise as HSI adjusts
The Hang Seng Index will change the way it calculates the weighting of its constituents today, reflecting the growing importance of mainland companies on the stock exchange.
HSI Services, the index compiler, is set to announce the biggest reform in the gauge's 37-year history after the market closes today.
'The influence of China plays has grown significantly in recent years in terms of market turnover,' said a fund manager, 'And as more and more giant mainland lenders are lining up for listings in Hong Kong, we just can't ignore their presence.'
After almost two months of market consultation on the calculation method for constituents, market observers expect the index compiler to adopt the widely supported free-float, market-weighted method with a weighting cap on each stock.
In such an index, each stock is weighted by the portion of shares readily available for trading. This excludes shares held by the company, its directors, strategic investors and other companies in which it also owns shares.
The free-float, market-weighted approach would favour H shares, usually held by major shareholders, the fund manager said.
China Construction Bank Corp, the first Big Four state-owned lender to list in Hong Kong in October last year, is generally tipped to be the first H share to join the blue-chip index due to its giant market capitalisation and huge turnover.
Sandy Lee, an analyst at Nomura International, said in a report that Construction Bank would have a weighting of 10.6 per cent in the blue-chip index using the free-float adjusted method of calculation, assuming a 15 per cent market-weighted capping.
The inclusion of the mainland's No3 lender is expected to prompt funds that mirror the Hang Seng Index, such as the Hong Kong Tracker Fund, to buy the shares.
Brokers said the buying spree of Construction Bank shares had already begun, with the stock surging 2.17 per cent to $3.525 yesterday on turnover of $2.19 billion, taking its gains to 6 per cent over the past four trading days.
The growing representation of H shares on the benchmark index is likely to substantially weaken the influence of heavyweights HSBC Holdings and China Mobile.
BNP Paribas analyst Winner Lee estimated funds and index-related derivative issuers would need to sell about 40.3 million HSBC shares if the weighting of HSBC was to be capped at 15 per cent from its current 30 per cent.
The number of shares sold would equal about 2.4 days' worth of the stock's average turnover during the past 30 days, Ms Lee added.
China Mobile, another index heavyweight, is expected to encounter similar selling pressure with its weighting being cut to 6.5 per cent from 16.5 per cent.
'Although HSI Services is going to implement the changes in phases over the coming 12 months, it just can't stop the immediate psychological impact to investors who are likely to sell the stocks right away,' said Ms Lee.
Both HSBC and China Mobile, however, managed to advance yesterday on the back of a surge on the broader market. HSBC edged up 0.53 per cent to $133.70 while China Mobile rose 0.59 per cent to $42.60.
