Hong Kong Hang Seng Index is about to undergo the largest reform in 51-year history, a move that will affect the tens of billions of dollars of funds tracking stock indexes.
After conducting industry consultation on the proposed Hong Kong benchmark stock index measures, Hang Seng Index announced its conclusion today (March 1) that if these measures are approved, it will greatly change the way the Hang Seng Index is set.
At the same time, Hang Seng Index Company announced the results of the fourth quarter review of the Hang Seng Index series after the market closes on Friday (February 26). The relevant changes will take effect on March 15, 2021. Passive buying or selling orders tracking the Hang Seng Index will be expected to be concentrated on March 12 (a trading day before the effective date), and relevant shares will experience large fluctuations in a single day.
All types of indexes have changed
According to the fourth quarter review report of the Hang Seng Index Company, relevant adjustments have been made to the existing indexes.
Hang Seng Index component stocks will increase from 52 to 55, and the three new companies are: Alibaba Health, Longfor Group, and Haidilao. No constituent stocks were removed, but the proportion of constituent stocks will be diluted due to the addition of new constituent stocks.
Ali Health and Haidilao are included within expectations, but Longfor Group is somewhat surprised because there are many constituent shares of real estate stocks, and the Hang Seng Index company intends to reduce the proportion of financial stocks and real estate stocks.
Ali Health, Longfor Group and Haidilao have weights in the index of approximately 0.89%, 0.62% and 0.58% respectively after being included in the Hang Seng Index. According to media reports, the asset size of the passive fund tracking the Hang Seng Index is approximately HK$160 billion. The addition of the three shares will drive the purchase of passive fund of approximately HK$1.42 billion, HK$990 million and HK$930 million, which is equivalent to 1.5 times, 2.9 times and 1.4 times of the average daily turnover of the three shares (930 million, HK$340 million and HK$680 million respectively).
Hang Seng China Enterprise Index component stocks reset from 52 to 50.
newly joined Country Garden Services 6098.HK, Nongfu Spring 9633.HK, excluding China Conch entrepreneurship 586.HK, PetroChina 857.HK, Hengan International 1044.HK and China Resources Gas 1193.HK.
As for the Hang Seng Technology Index , which includes the largest 30 Hong Kong listed technology companies, was launched on July 27 last year. The changes are as follows: the number of
constituent stocks has been reset from the current 32 to 30 (earlier because JD Health 6618.HK and Kuaishou 1024.HK were added according to the quick joining rules).
newly joined Haier Smart Home (600690) 6690.HK and Wanguo Data-SW 9698.HK, excluding Qiuti Technology 1478.HK, Maoyan Entertainment 1896.HK, Xindong Company 2400.HK and Yixin 2858.
Changes in the Hang Seng Comprehensive Index (Hang Seng Comprehensive Index):
Hang Seng Comprehensive Index has added 36 new constituent stocks, and 29 existing constituent stocks are excluded at the same time. The number of members will increase from the current 493 to 500.
Consulting Optimization Recommendations
Hangzhou Index Company will announce the consultation results on the recommendations for optimizing the Hang Seng Index to continue to become the most representative and important market benchmark in the Hong Kong market today (March 1).
Hang Seng Index Company earlier put forward five major suggestions for reforming the Hang Seng Index, including:
1) to increase the number of Hang Seng Index constituent stocks (65-80 companies).
When the Hang Seng Index was launched in 1969, there were only 33 constituent stocks. When the index began to be included in the H-share company in 2007, the number of constituent stocks increased to 38. It expanded to 50 constituent stocks in 2012, and maintained this level for the next eight years until it expanded to 52 in December 2020. With the increasing number of IPOs in Hong Kong, the Hang Seng Index's about 50 fixed-component stocks have become a bit "stretched". As of December 2020, its market value coverage ratio for the overall market has dropped to 57.6%, and its trading volume coverage ratio has even dropped to 50.5%, which can no longer match its position as the flagship index in the market.
2) Improve the distribution of constituent shares weight; the upper limit of constituent shares weight is reduced from the current 10% to 8%; at the same time, the upper limit of constituent shares with different rights/second listed constituent shares is increased from the current 5% to 8%.
In order to prevent leading companies from dominating the market, the Hang Seng Index recommends that the upper limit of a single stock be reduced from the current 10% to 8%, similar to the Hang Seng Technology Index. At the same time, when listed companies with different rights and second-place equity are allowed to be included this year, in order to prevent one-time excessive impact, the upper limit will not exceed 5%, but this time it is also recommended to unify it to 8%.
This will increase the weight of the "tail" companies within the index.
3) Cancel the minimum listing history requirement.
Hang Seng Index has strict new stock "fast channel" inclusion criteria. For example, super-large new stocks with market value in the top 5 markets will take three months to be included, and the ranking below 25th must be listed for 24 months.
The fast track currently used in this way is often included 10 working days after the market value meets a certain threshold, which can ensure that the index can capture leading new stocks to the maximum extent.
4) It is recommended to select constituent stocks by industry combination (for example, dividing 12 industries into 6 groups), and select based on the target coverage ratio of each industry combination (such as market value, transaction volume, etc.).
At present, the Hang Seng Index's stock selection criteria are still mainly based on market value and turnover, supplemented by the subjective considerations of the advisory committee such as industry representativeness and financial performance. Although this can make the index cover almost all blue-chip stocks with the largest market value, market structure issues will also lead to insufficient coverage of some "unpopular" or "weak" industries.
If adjusted according to this suggestion, it may sacrifice individual large-cap companies, but it can make the industry coverage more balanced.
5) maintains the constituent stocks classified as Hong Kong companies in a certain number (about 25 under the current circumstances) to support the representativeness of the Hong Kong sector in the index.
With the continuous return of large Chinese companies, especially leading Chinese stocks listed in the US, the weight of Hong Kong local companies in the Hang Seng Index has gradually dropped from 45.3% at the end of 2016 to 42.2% in December 2020, and is expected to further decrease in the future. Therefore, Hang Seng Index Company proposed whether to ensure a fixed number of local companies in Hong Kong to maintain its representativeness to local Hong Kong.
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