(Bloomberg) — The Hang Seng Index is undergoing a dramatic overhaul aimed at giving investors who track it greater exposure to China’s growing technological might. The heavy weighting of financial firms and state-owned enterprises will be reduced, which should go some way to rectifying the Hong Kong benchmark’s serial under-performance, and the near-doubling of the membership will add diversity. The changes aim to better reflect the city’s position as the preferred venue for mainland firms to sell shares, while keeping enough local companies on board to ensure it’s still a “Hong Kong” benchmark. Some $38 billion is invested in funds that follow the Hang Seng group of indexes.
The index will grow from 55 members in mid-March to 80 by mid-2022 and eventually 100. New stocks will need just three months of trading before they’re up for inclusion, regardless of market cap. Previously, stocks that weren’t among the 25 largest had to wait two years. Weightings for all shares will be capped at 8%, versus the current 10% for primary listings and 5% for secondary listings or stocks with unequal voting rights. Constituents will be selected based on their industry group, comprising financials, information technology, consumer discretionary and staples, property and construction, telecommunications and utilities, energy, materials, industrials and conglomerates and health care. And finally, the index will feature at least 20 Hong Kong companies in a new requirement.
Change was long overdue for the index, which was launched in 1969, for several reasons.
3. Will it still be a Hong Kong index?
Yes and no. The changes will ensure the new index captures the shift in Hong Kong’s stock market as Beijing positions the city to be the alternative funding center to New York. Tech firms — many clustered just across the border in Shenzhen — will be among the biggest capital raisers, as Chinese President Xi Jinping seeks ways to prevent the U.S. and its allies from blocking China’s rise. Hong Kong firms have reserved spots, but investors seeking heavy exposure to the local economy should look elsewhere, such as the MSCI Hong Kong Index.
4. Was there any opposition?
Some. About 60 individuals, corporates, exchanges and financial organizations replied to the consultation that Hang Seng launched Dec. 23. Four of the five proposals received 70% to 80% support or no preference. Respondents however didn’t agree with scrapping the listing history requirement entirely. New stocks tend to be more volatile and trading history helps inform investment decisions, some respondents said, which is why Hang Seng Indexes went with the three-month rule instead.