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Hong Kong benchmark to expand to 100 as part of historic overhaul that reflects city's changing role as financial hub

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Enoch Yiuenoch.yiu@scmp.com
·4 min read
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Hang Seng Indexes, which compiles Hong Kong's benchmark index, said on Monday that the number of constituent stocks of the Hang Seng Index will rise to 80 by mid 2022, before ultimately rising to 100.

The overhaul, the biggest in the index's 52-year history, reflects the changes in Hong Kong's role as a financial centre. The reforms follow the conclusion of a consultation period in January, which showed strong support for an increase in the number of constituent stocks, as this will improve the benchmark Hang Seng Index's overall coverage and achieve a more reasonable representation for each industry.

The expansion is intended to ensure that the index, the benchmark of the world's third-largest stock market, truly reflects the drastic changes in the local market, which has seen a wave of listings by big technology and pre-revenue biotechnology companies following a reform by bourse operator Hong Kong Exchanges and Clearing in April 2018. In its current guise, the Hang Seng Index continues to be dominated by financial companies and is viewed as outdated.

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The stocks to be included as part of the latest reforms will only been known when the quarterly review takes place in May. The benchmark currently has 55 constituents, following the addition of three stocks after a quarterly review last week. It did not remove any stocks. It added three stocks in a review in November as well, and removed one.

"Over the next year, Hang Seng Indexes is likely to add more stocks from among new economy companies, health care firms and US-listed mainland Chinese technology giants that have a secondary listing in Hong Kong," said Tom Chan Pak-lam, the chairman of industry body Institute of Securities Dealers.

Following the increase in its constituent stocks to 80, the Hang Seng Index will cover 71 per cent of the total market capitalisation of Hong Kong, up from 56.6 per cent currently. It will also cover 66 per cent of market turnover, up from 50 per cent now, Hang Seng Indexes said on Monday.

"The new enhancements to the HSI will further increase its representation and make the index more balanced and diversified," said Anita Mo, the company's chief executive.

Hang Seng Index, the benchmark, was launched in 1969. It was initially calculated by Hang Seng Bank, before Hang Seng Indexes was set up in 1986. The index started out with 33 constituent stocks, and expanded to 38 in 2006 with the first inclusion of H shares. The following year, the index compiler announced it would gradually expand to 50 constituent stocks, which was only achieved in December 2012.

In May last year, the company agreed to add companies with multiple voting rights to the benchmark, which led to the inclusion of Alibaba Group Holding, which owns this newspaper, smartphone maker Xiaomi and online food delivery firm Meituan.

Moreover, the share of the total market capitalisation of the Hong Kong stock market represented by the companies that are included in the benchmark has decreased, from 65 per cent in 2016 to 56.7 per cent as of December last year.

The Hong Kong stock market's total market capitalisation grew 458 per cent from HK$8.2 trillion (US$1.1 trillion) in 2005 to HK$45.6 trillion in 2020. Over this period, the proportion of mainland Chinese companies listed in the city rose from 41.6 per cent to 79 per cent, according to Hang Seng Indexes' consultation paper.

The company will also proceed with a proposed cap on the weighting of stocks at 8 per cent, lower than the current limit of 10 per cent. Only two stocks - insurer AIA and Chinese social media giant Tencent Holdings - currently have a weighting of 10 per cent and face a cut. The influence that Alibaba, Xiaomi and Meituan enjoy will, on the other hand, increase, after their weighting rises to the new limit. They were included in the benchmark with a weighting of 5 per cent each.

As part of the revamp, Hang Seng Indexes will also insure that between 20 and 25 Hong Kong companies are among the constituent stocks, so as to prevent their representation from falling as more Chinese companies are added to the benchmark. The index currently has 24 Hong Kong firms and 28 Chinese companies.

The latest reforms also shorten the time required for companies to become a constituent stock. According to the overhauled rules, they will only be required to have been listed for three months - down from the current requirement of two years - before they can be added to the index.

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 © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.