Hang Seng Index needs to reflect diversity of HK equity market

March 24, 2020 13:32
The HSI is more than just a technical index used in market methodology, it is an international symbol that represents Hong Kong Inc, the author notes. File photo: Bloomberg

One of the strategic goals of Hong Kong Exchanges and Clearing Ltd (HKEX) is to attract global listings and international capital as it connects Mainland China with the rest of the world. Given this, it is essential that the benchmark Hang Seng Index (HSI) reflect the truly diverse nature of the market.

With international markets experiencing exceptional turbulence and globalization on its back foot, Hong Kong needs to emphasize its unique openness and diversity, and the HSI is an important part of doing that.

Hang Seng Indexes has invited consultation on the positioning of their most famous index, the HSI. They have invited feedback on topics such as the eligibility of companies with weighted voting right (WVR) shares, secondary listings and the weighting of the financial sector.

This consultation is a valuable opportunity to address and appreciate the incredible expansion of the market because the HSI is more than just a technical index used in market methodology, it is an international symbol that represents Hong Kong Inc.

HKEX was honored to participate in this consultation. Our view is that the HSI must not impose artificial barriers on listed shares, but must rather reflect the rich diversity and growth of the Hong Kong market if this growth is to continue.

Reflecting market growth

The number of companies listed on the Hong Kong stock market has grown tremendously in recent years. At the end of 2019 there were 2,449 listed companies, up from 1,368 in 2012. Hong Kong now routinely leads the globe in new equity issuance, raising more new capital each year than any other jurisdiction, and is the sixth largest in the world in terms of total market capitalization, according to the World Federation of Exchanges.

HKEX has operated a safe, stable market for investors even as it has evolved to become ever more layered and sophisticated, attracting diverse listings such as those from Budweiser, Tencent and Alibaba. Not only is it now home to major corporates from around the world, but it is also welcoming of those with more innovative share structures.

Since its launch in 1969, the HSI has reflected the performance of the largest and most liquid companies within the Hong Kong stock market. Tsingtao Brewery Co made history with the first H-share listing in 1993, and now this H-share segment has grown to 284 listings. In 2006 H-shares were included in the HSI. The first REIT, Link REIT, was listed in 2005, and it was included in the HSI in 2014.

Hong Kong's international appeal

Hong Kong's attractiveness to companies seeking a listing lies in the very fact that it is a global capital formation center with international issuers and suppliers of capital. We have well-developed and liquid financial markets, a strong rule of law and robust business practices. Our listing regulations also ensure strong investor protections. The free capital markets of Hong Kong reflect all of these characteristics directly in the market capitalization and liquidity of the listed companies that benefited from making Hong Kong their home.

A key ambition contained in HKEX’s three-year strategic plan is to support the international portfolio diversification of mainland investors and to further facilitate the internationalization of domestic capital markets.

What is the Hong Kong stock market if not one of international character, attracting the best from around the world? Investors themselves, in buying shares of companies founded and based in other jurisdictions, confirm the unique nature of our stock market as one not bounded by definitions of geography.

To create an entire class of companies that are allowed to trade on our exchange, and be amongst the largest by capitalization and trading volume, yet remain ineligible for our premier index, would undermine the ability of the Stock Exchange of Hong Kong to attract premium corporate businesses and brands. The potential to be included in the HSI is a key attraction for a large international company in listing its shares in Hong Kong.

Excluding companies based on the location of their head office or their share structure would also introduce an element of subjectivity that is unhelpful in financial markets. An artificial quota system would curtail the extent to which any investment that tracked the HSI could be comprehensive in its nature. This could diminish the attractiveness of HSI-linked investments for international investors, ultimately damaging the long-term competitiveness and success of the market.

Represent the market

Regulators, working in tandem with the industry and public consultation, determine the worthiness of potential listing companies. Investors, participating in a free market, determine the value and liquidity of those shares. The HSI should reflect the results as accurately as possible.

The HSI carries the banner for Hong Kong Inc. and represents us to the rest of the world. Let us ensure that it shows the world the incredible diversity, innovation and open-mindedness that has shaped our market into what it is today.

– Contact us at [email protected]

RC

Senior Vice President, Equities Product Development, HKEX