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Allowing China's tech behemoths like Alibaba, Xiaomi to join Hang Seng Index is vital for benchmark stock gauge's future, says boss

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Proposals that would pave the way for China's technology giants to be included in the Hang Seng Index will be vital to maintaining the index's status as the benchmark for Hong Kong's stock market, according to the boss of the company that compiles the gauge.

Hang Seng Indexes Company is weighing the feasibility of allowing companies with weighted voting rights, such as the Chinese smartphone maker Xiaomi, and those with secondary listings like the internet behemoth Alibaba Group Holding, to be included, according to a consultation paper published on its website this month. It is also considering capping the weighting of the financial sectors in the key gauge.

"The Hang Seng Index needs to track the performance of the biggest and the most liquid stocks of the Hong Kong market. If these largest technology giants are the most traded stocks here, but then they are excluded from the Hang Seng Index, it will reduce the role of the Hang Seng Index as a benchmark of the market. This is why we want to make a change," chief executive Vincent Kwan said in an interview.

In Kwan's view, the current reform is the potentially most important revamp of the gauge since the inclusion of H-shares " Chinese mainland companies listed in Hong Kong " in 2006. Back then, there were many large H-shares listings, including the big four state-owned banks which floated in Hong Kong between 2004 and 2005, triggering their addition to the benchmark.

Compiler opens door for China's tech giants to join Hang Seng stock benchmark

Nowadays, there are nine H-share firms included as constituent stocks of the Hang Seng Index, with a combined 25.37 per cent weighting. The top three are China Construction Bank (7.81 per cent), Ping An (5.52 per cent) and Industrial and Commercial Bank of China (4.75 per cent).

The index compiler on January 13 issued its consultation paper to seek public feedback about the changes. That will take until mid-March, with the result to be announced in May.

While the Hang Seng Index is the most widely quoted gauge of the Hong Kong stock market, it is yet to include the largest stock listed in Hong Kong by market capitalisation, Alibaba Group Holding. The tech giant was worth HK$4.69 trillion (US$603.36 billion) on January 22, or 12 per cent of total market cap in the city. The owner of the South China Morning Post is not qualified to be in the index because it now has a secondary listing in Hong Kong.

The index only accepts primary listings because most secondary flotations, such as the insurer Manulife, have tended to generate a low turnover in the market.

Hong Kong grabs IPO crown as Alibaba, Budweiser mega listings lift funds

However, Alibaba, together with another two dual-class shareholding companies, Meituan Dianping and Xiaomi Corporation, are always among the top five most traded stocks here. The trio had a combined turnover that accounted for 9 per cent of the total on January 22.

Tom Chan Pak-lam, chairman of the Institute of Securities Dealers, an association of stockbrokers, supports the idea of adding them to the gauge.

"Hang Seng Index should represent the largest companies in Hong Kong. There will be more US-listed tech giants returning to list in Hong Kong. If they are large and heavily traded, they should be included in the benchmark index," Chan said.

Mark Konyn, group chief investment officer of AIA, said institutional investors also supported the move.

"The mood has changed among a number of institutional investors globally. Many seem to have to put to one side their governance concerns related to split shares and differentiated voting rights to access new-economy investment opportunities," Konyn said

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.