Pedestrians wearing face masks walk past a stock market display board showing the Hang Seng Index losses in Hong Kong in March 2020. The index hit a 13-year low on Monday. Photo: AFP / Miguel Candela Poblacion / Anadolu

HONG KONG – The Hang Seng Index (HSI), the Hong Kong’s stock market benchmark, will undertake one of the biggest reforms in its 51-year history by raising the number of its constituent stocks from 55 to 100 and lowering the weighting cap of individual stocks from 10% to 8%.

The Hang Seng Indexes Company announced on Monday details of five changes to its flagship HSI to ensure it remains the most representative and important benchmark of the Hong Kong bourse.

The number of HSI constituents will be increased from 55 to 80 through regular index reviews by mid-2022 and fixed ultimately at 100, the company said in a press release.

HSI constituents will be selected from seven industry groups including financials, information technology, healthcare, industrials and conglomerates, energy, utilities and telecommunications, and consumer and staples, with the aim of achieving a more balanced representation of the Hong Kong stock market.

The target is to achieve a market capitalization coverage of not less than 50% for each industry group.

Hang Seng Indexes Company will maintain 20 to 25 constituents that are classified as Hong Kong companies in the HSI. Both the combination of the industry groups and the number of Hong Kong constituent stocks in the index will be evaluated at least every two years.

The listing history requirement will be shortened to three months, compared with the current range of three to 24 months based on the candidates’ market values. This will provide flexibility for the timely addition of new listings.

All HSI constituents, including weighted voting rights and/or secondary-listed constituents, will be subject to an aligned weighting cap of 8%. The same cap will be applied to the Hang Seng China Enterprises Index (HSCEI).

A woman looks at a stocks display board showing the Hang Seng Index (HSI) down by 5.56% after trading closed for the day in Hong Kong on May 22, 2020. Photo: A. Wallace / AFP

The five changes will be implemented starting from the May 2021 Index Review and effective in the June 2021 Index Rebalancing.

“The new enhancements to the HSI will further increase its representation and make the Index more balanced and diversified,” said Anita Mo, chief executive officer of Hang Seng Indexes Company.

“Building on HSI’s market history of more than 50 years, these enhancements will ensure that the Index remains the most important benchmark of the Hong Kong stock market and will continue to grow and evolve to keep pace with the market.”

More mainland firms

Last December, the Hang Seng Indexes Company published a consultation paper to solicit market feedback on proposals related to reforming the HSI.

It said the Hong Kong stock market had undergone significant structural changes over the past 15 years with total market capitalization growing by 458% from HK$8.2 trillion (US$1.06 trillion) in 2005 to HK$45.6 trillion in 2020.

Meanwhile, the proportion of mainland companies increased from 41.6% to 79.0% over the same period, while information technology overtook financials as the largest industry in 2019.

Started with only 33 constituents at launch in 1969, the number of HSI constituents increased to 38 in 2007 when it began to include H-shares companies.

The index then gradually expanded and reached 50 constituents in 2012 when there were about 1,380 listed companies in Hong Kong and the HSI covered roughly 60% of the aggregate market capitalization at that time.

The number of constituents remained unchanged at 50 for more than 8 years and expanded to 55 last month.

The HSI constituents are principally selected based on the size of the companies and the potential candidates usually have at least 2 years of listing history. The index is free-float market capitalization-weighted with a cap of 10% on individual constituent weighting. Secondary-listed/weighted voting rights (WVR) constituents are subject to a 5% weighting cap.

Over the past few months, Hong Kong’s listed Chinese technology stocks have skyrocketed, thanks to the frenzy of buying of technology stocks in the United States and the cash influx from mainland China.

On January 25, shares of Tencent Holdings recorded a high at HK$766.5 but then experienced a correction from mid-February to last Friday. They rebounded to HK$697 on Monday, up 23.6% from HK$564 at the end of last year.

Meituan, a Chinese e-commerce platform, also saw a similar rise. Its shares recorded a high of HK$451.4 on February 17, but then retreated to HK$340 last Friday. They have increased 24.5% so far this year.

As of January, the four largest Chinese IT firms – Tencent, Meituan, Alibaba and Xiaomi – had a combined weighting of 25.92% in the HSI.

Impact on stocks

Market analysts said some of the changes to the HSI would have an immediate impact on several stocks.

As the listing history requirement will be shortened to three months, Chinese video app company Kuaishou, which made its debut on the Hong Kong stock exchange on February 5, will probably be put on a fast track to be included in the HSI in May. The other two hot candidates include JD Health and Smoore International.

The Kuaishou Technology logo on a mobile phone. Photo: Supplied

The new weighting cap of 8% may have a negative impact on Tencent and AIA Group, which had a weighting of 11.01% and 9.89%, respectively, in the HSI as of January.

It was an irreversible trend that the HSI would increasingly reflect more about the economy of mainland China than Hong Kong, said Liao Qun, chief economist at China CITIC Bank International.

New economy stocks, particularly internet-related firms from the mainland, were having robust growth and would eliminate the traditional blue chips in the HSI over the long run, Liao said.

Maintaining a certain proportion of constituents that are classified as Hong Kong companies in the HSI would not be able to help the index achieve a more balanced representation of the Hong Kong stock market, Liao said.

Hong Kong should diversify its economy from financials to new economy sectors and nurture new businesses by cooperating with other cities in the Greater Bay Area, he said, adding that the territory’s universities had a lot of achievements in scientific research but did not commercialize them.

To better reflect the structural change of China’s economy and the Hong Kong equity market, the HSI would continue the trend of the past years of increasing the weighting of new economy stocks in the index, said Cliff Zhao, chief strategist at CCB international. From 2010 to 2020, new economy sectors as a proportion of the HSI rose from 15.4% to 31.8%.

However, the volatility of the HSI would also trend higher due to the shifts of weighting from relatively stable financials to more volatile technology stocks, Zhao said.

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