The Hang Seng Index is ready for its first major shake-up in half a century. It’s overdue.
The benchmark with its current 50-plus constituent stocks needs to be more representative of the overall market activities on the exchange. This is the aim of the overhaul, first pushed by the exchange and the Securities and Futures Commission in 2018.
The plan is to raise to 80 the number of constituent stocks by the middle of next year and eventually to track 100. Since 2018, the listing of 43 companies has added HK$11 trillion in capitalisation to the world’s third-largest stock market, accounting for 40 per cent of all capital raised during this period.
These were mostly companies based in technology or the internet. It’s high time the index, which has been heavy on financials, expands to reflect this changing trend.
The overhaul includes a proposed cap on the weighting of stocks at 8 per cent, from the current limit of 10 per cent. Only two stocks, insurer AIA and mainland social media giant Tencent, currently have a weighting of 10 per cent. They will face a cut.
The weighting of mainland giants Alibaba – which owns this newspaper – Xiaomi and Meituan will enjoy a lift to 5 per cent each.
That’s actually a good thing. It’s arguable whether a Chinese company such as Tencent that derives more than half of its revenue from mobile games should occupy such a heavy weighting on the benchmark.
Perhaps for sentimental reasons or just to be politically correct, the revamp will make sure the index maintains between 20 and 25 Hong Kong companies among its constituent stocks. However, about 80 per cent of the market’s capitalisation is made up of companies domiciled on the mainland.
Keeping a minimum threshold of Hong Kong companies such as stolid old-economy property groups may be a good gesture to retain some semblance of “Hongkongness”. It does little, though, to encourage local innovation or entrepreneurship, at least while the likes of ride-sharing GoGoVan are still not qualified to list on the main board.
With the rise of China and its tech-driven sector, it’s proving hard for the Hong Kong index to balance the need to stay both local and relevant.