White Collar
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Hong Kong needs to widen the scope of its market indexes

The index compiler said last week it plans to add in red chips and privately owned mainland companies into its index, in addition to H-shares

PUBLISHED : Monday, 13 February, 2017, 1:26pm
UPDATED : Monday, 13 February, 2017, 1:27pm

The latest move by the Hang Seng Indexes Company to revamp the composition of the Hang Seng China Enterprises Index reflects the changing nature of how more important a role Chinese companies, newly created start ups and private enterprises play in the Hong Kong economy.

On Friday, the index complier said it plans to add in red chips and privately owned mainland companies into its index, in addition to H-shares.

This is an interesting development. The Hang Seng China Enterprises Index first launched in August 1994, just a year after the first H-shares, Tsingtao Brewery, were listed in Hong Kong in July 1993.

H-shares refers to state-owned enterprises listed in Hong Kong and in 1993, this was the only format of Chinese enterprises listed in Hong Kong. This is why the index is also known as the H-share index.

Since then, the market has developed hugely and include H-shares and a of lot red chips, or companies incorporated in Hong Kong, but with a mainland Chinese parent.

By at the end of January, the market cap of the 153 red chips stood at HK$5.202 trillion, representing about 20.17 per cent of the total market value of the Hong Kong market.

That total is only slightly lower than the 219 H-shares which collectively are worth HK$5.470 trillion or 21.21 per cent, according to HKEX statistics.

Many giant Chinese red chips such as China Mobile, CNOOC, CITIC and Lenovo are not qualified to join as constituent stocks of the Hang Seng China Enterprises Index.

The index now also does not count on privately held enterprise in China, so companies such as internet firm Tencent isn’t a constituent either.

Now the Hang Seng Indexes said it wants to add in red chips and privately held mainland enterprises to widen the scope.

This is a good move, as it will mean Chinese enterprises listed in Hong Kong wont be just restricted to H-shares. This change, more details of which will be released in August, will turn the index into a real China index of Hong Kong shares, instead or just tracking H-shares.

This is also in line with the strategy of Hong Kong Exchanges and Clearing to launch a new third board to attract more new economy and technology firms from China. Many of these companies are privately held and they should be qualified to be added into the index.

The index complier should also widen the industry scope of the Hang Seng China Enterprises Index. Among its 40 constituent stocks, 20 are financial firms and represent 70.67 per cent of its weighting. This is a far more than the second largest sector, of three energy firms which has 12.44 per cent of the rating and the first is five consumer goods that have a 4.7 per cent weighting. There is no technology firms nor conglomerates in the index.

Widening the scope of the index is a must to reflect the great changes taking place by Chinese companies in Hong Kong.

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