Hong Kong benchmark compiler Hang Seng Indexes proposes increase in constituent stocks for ‘reasonable representation for each industry’
- Increasing constituents to between 65 and 80 can ‘achieve a reasonable representation for each industry’: Hang Seng Indexes
- Proposal seeks at least 25 Hong Kong firms as constituent stocks to address concerns about falling representation
Hang Seng Indexes, which compiles Hong Kong’s benchmark index, is seeking an increase in the number of constituent stocks in its second major revamp in eight months.
The change, proposed in a consultation paper released on Tuesday, will help it meet the requirements of a drastically changed stock market, one that is now dominated by big technology companies.
The index was started with 33 constituent stocks in 1969. Hang Seng Indexes will collect views until January 24 and announce the result in February.
The proposed changes are expected to better reflect the complexion of the Hong Kong stock market. The Hang Seng Index, which started adding big technology companies after a revamp in May this year, continues to be dominated by financial companies and is viewed as outdated. Moreover, the market capitalisation covered by companies that are included in the gauge has decreased from 65 per cent in 2016 to 56.7 per cent now.
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The total market capitalisation of the Hong Kong stock market has grown by 458 per cent from HK$8.2 trillion (US$1.06 trillion) in 2005 to HK$45.6 trillion in 2020. Over this period, the proportion of mainland Chinese companies listed in the city has also increased, from 41.6 per cent to 79 per cent.
The compiler has also proposed capping the weighting of stocks at 8 per cent, which is lower than the current limit of 10 per cent. Currently, only its top three constituent stocks have a weighting higher than the new limit, with insurer AIA at 10.13 per cent, gaming giant Tencent Holdings at 10.1 per cent and HSBC at 8.95 per cent.
The proposed changes were welcomed by the Hong Kong Securities Association, an industry body. “The direction of reform is timely and appropriate since the inception of the index. The bigger the number, the wider the representation,” said Gordon Tsui Luen-on, the association’s chairman. “Certainly, it may stop big players from dominating the index. However, there are concerns that Hong Kong companies will become a minority in the index.”
Hang Seng Indexes said that the proportion of Hong Kong companies might indeed fall as more mainland Chinese companies are added to the benchmark, and has proposed that it has at least 25 Hong Kong firms as constituent stocks. Currently, the index includes 24 Hong Kong companies and 28 mainland Chinese firms.
Tuesday’s proposal follows a decision in May to add companies with multiple voting rights to the benchmark. Alibaba Group Holding, which owns this newspaper, smartphone maker Xiaomi and online food delivery firm Meituan joined the index as a result, and their weighting was capped at 5 per cent each.
These reforms have also paved the way for Chinese companies listed in the United States and elsewhere to launch secondary share sales in Hong Kong. Alibaba, JD.com and NetEase have listed in the city, as a result, since November.
