Hang Seng proposes major overhaul of Hong Kong stock index

The sweeping proposal comes amid significant changes within Hong Kong's stock market. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Hang Seng Indexes is considering wide-ranging changes to Hong Kong's stock benchmark that would dilute the influence of its largest companies.

The five proposals include maintaining "a certain number of constituents classified as Hong Kong companies", according to a 16-page consultation paper released Tuesday (Dec 22).

Hang Seng is also considering increasing the number of members to between 65 and 80, as well as capping weightings at 8 per cent and fast tracking new listings.

The index currently has 52 stocks with weights limited to 10 per cent. Secondary listings or shares with unequal voting rights are capped at 5 per cent.

The sweeping proposal comes amid significant changes within the city's stock market, as a wave of Chinese megacaps choose the financial hub as a preferred venue to sell shares.

Hong Kong's benchmark index is near its lowest level versus the MSCI World Index in 17 years, and the gauge's abundance of old-economy financial stocks has made it look outdated in an age when China's tech giants have increasing sway.

"The objective of an index is to represent the local market, not the local economy," said Kenny Wen, wealth-management strategist at Everbright Sun Hung Kai. "So yes - the benchmark will inevitably lose its Hong Kong colour. The index could have higher valuations and greater volatility if these changes lead to the inclusion of more tech and healthcare firms. It will be easier to trade."

Launched in 1969, the Hang Seng Index started out with 33 constituents, rising to 38 in 2007 when it began to include H-share firms.

In 2012, it expanded to 50 with the index covering roughly 60 per cent of the aggregate market capitalisation at the time, a number unchanged until this year.

The proportion of mainland companies increased to 79 per cent of the index this year from 41.6 per cent in 2005, according to Hang Seng's consultation paper.

Hang Seng is soliciting feedback to the proposals through Jan 24. The changes would affect tens of billions of dollars in pension fund assets and exchange-traded funds that track the index.

Join ST's Telegram channel and get the latest breaking news delivered to you.