Why Changes to Hong Kong’s Stock Index Are a Big Deal

The Hang Seng Index is undergoing a dramatic overhaul aimed at giving investors who track it greater exposure to China’s growing technological might. The heavy weighting of financial firms and state-owned enterprises will be reduced, which should go some way to rectifying the Hong Kong benchmark’s serial under-performance, and the near-doubling of the membership will add diversity. The changes aim to better reflect the city’s position as the preferred venue for mainland firms to sell shares, while keeping enough local companies on board to ensure it’s still a “Hong Kong” benchmark. Some $38 billion is invested in funds that follow the Hang Seng group of indexes.

First off, the index compiler is adding three companies -- Xinyi Solar Holdings Ltd., BYD Co. Ltd. and Country Garden Services Holdings -- boosting the number to 58 as of June 7. The benchmark should grow to 80 companies by mid-2022 and eventually 100. New stocks will need just three months of trading before they’re up for inclusion, regardless of market cap. Previously, stocks that weren’t among the 25 largest had to wait two years. Weightings for all shares will be capped at 8% as of June 7, versus the previous 10% for primary listings and 5% for secondary listings or stocks with unequal voting rights. Constituents will be selected based on their industry group, comprising financials, information technology, consumer discretionary and staples, property and construction, telecommunications and utilities, energy, materials, industrials and conglomerates and health care. And finally, the index will feature at least 20 Hong Kong companies in a new requirement.