A number of Chinese tech giants, including Xiaomi and Alibaba Group Holding, will be allowed for the first time to be included in Hong Kong’s benchmark Hang Seng Index. According to a report by the South China Morning Post (SCMP), the change comes as a result of a rule change in the kinds of companies that are allowed to list on the platform.
Indeed, for the first time, the Hang Seng Index will include companies with multiple classes of voting rights (including weighted voting rights, or WVR), and other companies with secondary listings, as constituent stocks. In addition to Xiaomi and Alibaba, the reform paves the way toward listing a number of other major tech companies in the region.
”The decision to add these companies into the Hang Seng Index is strongly supported by the market.”
The goal of the reform is to ensure that the Hang Seng Index, which tracks the third-largest stock market in Asia, includes the most valuable stocks; previously, WVR and secondary-listing companies were excluded from the Index in spite of the fact that many of them are the largest and most traded shares in Hong Kong.
However, for companies with secondary listings, the index compiler will only count the shares registered in Hong Kong. According to SCMP, “Alibaba had about 23 percent of its issued shares registered in Hong Kong at the end of March.”
Vincent Kwan, chief executive of Hang Seng Indexes, said in a telephone conference after the announcement that “the decision to add these companies into the Hang Seng Index is strongly supported by the market, with 90 percent of respondents in favor.”
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“The change will be an important milestone for the Hang Seng Index to cover the increasing number of technology companies listing in Hong Kong.”
”Hong Kong capital markets are moving closer to the mainland trend.”
Still, Kwan said that many market respondents are hesitant about the change: they want to see a limit on the proportion of these companies that make up the benchmark index because of the fact that secondary-listed companies can evade certain disclosure requirements; other investors believe that a WVR structure is not fair to all shareholders.
Frederick Chu Ian-kit, head of ETFs at China Asset Management (Hong Kong), told SCMP that the rule change is “a good move.”
“It reflects the Hong Kong capital markets are moving closer to the mainland trend in which technology companies are playing an important role in the market,” he said. “The Hang Seng Index, as the signature index of Hong Kong, will catch up on this trend. It will also encourage more US-listed technology firms to have a secondary listing in Hong Kong.”
The rule change is the most significant reform to have taken place since 2006 when a rule change allowed the inclusion of H-shares on the Hang Seng Index.