Written by: Yang Yingwei
The last update date: 2021-03-03 19:24
The Hang Seng Index Company recently (March 1) announced the results of the consultation on the reform of the constituent stocks of the Hang Seng Index. It revised the stock selection method, listing history requirements, the number of constituent stocks and the weight of shares, which is the biggest change in 50 years.
The most concerned by the outside world is that the constituent stocks of the Hang Seng Index will increase from 55 to 100, among which about 20 to 25 "Hong Kong companies" will remain in order to maintain their representativeness.
The international political and economic landscape has drastically changed. Chinese concept stocks have returned. With the support of "northern water and southward", the structure of the Hong Kong stock market has undergone significant changes. The reform of the HSI is natural and necessary, but the question is how to change—but secondly. In the reform, it seems that the Hang Seng Index Company has not been able to clarify the role of the Hang Seng Index. Some suggestions have even weakened its scientificity and representativeness. For example, the definition of "Hong Kong Company" is still extremely unreasonable.
The Hang Seng Index Company announced in early December last year the "Recommendations for Optimizing the Hang Seng Index to Continue to Be the Most Representative and Important Market Benchmark in the Hong Kong Market" (hereinafter referred to as the "Optimization Recommendations"), and published consultation results until this Monday (March 1) .
This reform is imperative, because since the Hong Kong Stock Exchange implemented major reforms in 2018, the entire stock market has undergone structural changes-a large number of young and dynamic Mainland companies have come to Hong Kong for listing, and gradually surpassed Hong Kong’s old economy companies , Sit on the top spot in the ranking of market value.
According to statistics from the Hang Seng Index, the market value of mainland enterprises has increased from 41.6% in 2005 to 79% in 2020. The information technology industry has also surpassed the financial industry in 2019, becoming the industry with the largest market capitalization at 35.4%. 17% of the industry has doubled.
In order for the Hang Seng Index to maintain its representativeness and to scientifically reflect market changes, it is of course reasonable to incorporate reforms into the rules.
According to the consultation results, the constituent stocks of the Hang Seng Index will increase from 55 to 100. As for how to increase, there are two highlights. One is to merge 12 categories into 7 industries and select constituent stocks according to industry groups, and the other is extremely large. Shorten the listing history restriction (see the figure below for details).
It is widely believed that the HSI reform is to include more mainland new economy stocks. This argument ignores the guiding role of the Hang Seng Index as a secondary market index in Hong Kong for the real economy.
Liao Qun, chief analyst of China CITIC Bank (International), said in an interview with "Hong Kong 01" a few days ago that the HSI restructuring intends to guide the structural development of the Hong Kong stock market: "By emphasizing the "representation of Hong Kong region", more Hong Kong companies will be promoted. Incorporate the HSI into consideration to guide and cultivate local companies."
Source: Hang Seng Index Company
The above two highlights are just to help the Hang Seng Index play a guiding role: selecting constituent stocks by industry and including the company’s industry representativeness as a reference indicator can form an incentive effect for companies, encourage local economies to attack diversified industries, and develop Hong Kong’s economy. The new track; and the reduction of the listing history to three months has given the new economic "unicorns" the opportunity to compete with the established blue-chip stocks on the same stage, in a disguised form to stimulate the old economic enterprises to seek innovation and change, and stimulate market vitality.
For example, according to the "Optimization Proposal", after selecting constituent stocks by industry, the number of constituent stocks included in the healthcare industry increased from 3 to 10 (in the case of 80 new constituent stocks), and Its coverage rate has also increased from 29.3% to 78.3%.
After the reform of the Hong Kong Stock Exchange, a large number of medical and biotechnology companies benefited from the relaxation of the profit threshold and came to Hong Kong for listing, and changes in the market value of these companies were not effectively reflected in the Hang Seng Index in the past.
The Hong Kong medical industry has always been one of Hong Kong's six dominant industries, and there are many local companies in the current listed biotechnology companies.
After the reform of the Hang Seng Index, it has been able to pick up industry benchmarks, further revitalize the industry ecology, and encourage the development of more market-recognized unicorns in Hong Kong's medical technology industry.
The "optimized" Hang Seng Index gives the new economic "unicorns" the opportunity to compete with established blue-chip stocks on the same stage, in a disguised form to stimulate the old economic enterprises to seek innovation and change (Photo by Yu Junliang)
Two big questions
Two big questions
However, the market is also worried that after the restructuring, a large number of mainland new economy stocks will be "dyed" (incorporated into constituent stocks), and the Hang Seng Index will become a mainland new economy index.
The Hang Seng Index’s solution is to propose “the number of constituent stocks of Hong Kong companies be 20-25” in order to maintain the Hang Seng Index as the “regional representativeness” of the Hong Kong stock market index.
According to the results of the consultation, more than 80% of the respondents agreed or were neutral on the grounds that they could "keep Hong Kong elements" and distinguish the "Hang Seng Index" from the "Hang Seng China Enterprise Index", but this is the so-called "regional representativeness" It also brings up two questions.
First, is it really a long-term strategy to amend the rules to maintain the regional representativeness of the Hang Seng Index?
In terms of scientificity and representativeness, the Hang Seng Index is nothing more than a passive reflection of the survival of the fittest in the market.
Its increasingly "inlandization" and "technology", the supporting logic behind it is the rise of the mainland's innovative economy and the loss of Hong Kong's traditional economy.
Under this circumstance, the HSI maintains "regional representativeness" by modifying the rules and other "prestige efforts", which can be described as "treating the symptoms but not the root cause."
The fundamental solution should be to require the local real economy to show its vitality, to continuously cultivate new economic unicorns to accept the test of the market, and to compete with the Chinese concept stocks that are currently popular in the capital market for bargaining chips.
At present, the problem of industry consolidation in Hong Kong has been delayed and the development of innovation and technology is lagging behind. Therefore, the real economy's problems are directly reflected in the capital market.
Although Hong Kong companies account for 24 of the current 55 constituent stocks of the Hang Seng Index, with a weight of approximately 41.5%, most of them are in the real estate and real estate-derived financial industries.
According to the "Optimization Proposal" data (the figure below), the number of IT companies listed on the Hong Kong Stock Exchange is 39, but the total market value is more than three times that of 103 real estate construction companies. This shows the real estate and financial industry's investment The attractiveness of the new economy has been greatly reduced, and it is even harder to talk about competing with new economic enterprises.
Even if more than 20 Hong Kong companies are forced to stay in the Hang Seng Index, they may be reduced to "retarding".
There is public concern that after the restructuring of the Hang Seng Index, a large number of mainland new economy stocks will "dye blue", making the HSI a "Mainland New Economy Index."
(Data Picture/Photo by Liang Pengwei)
Liao Qun also pointed out that in order to maintain the representativeness of the Hong Kong region, the Hang Seng Index needs to diversify the Hong Kong economy: "If the financial industry is still developed and all others are weak, there are not many (Hong Kong companies) that can squeeze in (HSI). "Because Hong Kong is an international financial center, there is still room for development in the financial industry. It is not ruled out that new companies will emerge. "However, Hong Kong can enter the mainland by only one industry (enterprise), but it cannot match the large number of new economic enterprises in the Mainland. It still requires the upgrading and diversification of local industries."
Second, what is a "Hong Kong company" under the definition of Hang Seng Index Company?
Can the inclusion of these 25 "Hong Kong companies" maintain "regional representation"?
According to the Hang Seng Index, to reflect regional representativeness and retain Hong Kong elements, a "Hong Kong company" should refer to a local company whose headquarters or company is registered in Hong Kong.
Because local companies interact with the local real economy to provide employment and taxation for Hong Kong, and the local real economy is also affected by its revenue.
As everyone knows, the "Hong Kong company" defined by the HSI is very different.
The reporter consulted the "General Rules for Index Computation" of the Hang Seng Index Company (hereinafter referred to as the "General Rules") and found that the HSI Company classified Hong Kong-listed securities by region as shown in the following table:
Source: Hang Seng Index Company "General Rules for Index Compilation"
According to the General Regulations, both foreign-funded Hong Kong companies and local Hong Kong companies are included in the index model indiscriminately as "Hong Kong companies".
This is because the "General Provisions" divides listed companies into two categories: "Foreign Companies" and "Greater China Companies" by region. The former refers to those registered outside of Greater China such as Hong Kong, Macau and Mainland China, and the main business is also from Greater China. Companies outside the region; the latter is further divided into "Hong Kong securities" and "Mainland securities", where "Hong Kong securities" means that more than 50% of its revenue comes from Hong Kong companies outside of Mainland China, and their profits and asset distribution will be taken into consideration. ——So, those companies that set up offices or branches in Hong Kong but whose parent company is US-funded or British-funded, such as AIA, HSBC Holdings, Budweiser Asia Pacific, etc., are also equivalent to "Hong Kong Securities" under "Greater China Company". ".
These foreign-funded Hong Kong companies stand up to the title of "Hong Kong company", but in fact their business has little interaction with Hong Kong's real economy.
Regardless of the fact that foreign-funded Hong Kong companies have no incentive to promote the transformation and upgrading of Hong Kong's economy, they cannot create many local labor jobs for Hong Kong, and their companies are not mainly taxed in Hong Kong.
Take HSBC Holdings as an example. Its headquarters is located in London. Its tax payment in Hong Kong in 2018 was less than half of the tax paid in the United Kingdom, reflecting that its main revenue also comes from European countries such as the United Kingdom.
If such companies are also called "Hong Kong companies," then the "Hong Kong regional representativeness" of the HSI is simply untenable.
HSBC is headquartered in Hong Kong, and the tax paid in Hong Kong is far less than that in the UK and Europe, but it also holds the quota of "Hong Kong company".
(Information Picture/Photo by Wu Weihao)
From another perspective, it is also very unfair to local companies to call both local Hong Kong companies and foreign companies "Hong Kong companies," and sharing these 25 "regional representatives".
Local enterprises are mainly small and medium-sized enterprises, and their market value is certainly not comparable to these foreign-funded enterprises with a long history, healthy capital, and global deployment.
According to this classification, among the last 25 companies that really belong to Hong Kong people, there may be only one place left in real estate finance.
In order to maintain "regional representation", Chinese-funded companies are excluded, so why can foreign-funded companies enjoy preferential treatment?
The HSI company should clarify the definition and amend the rules to allow foreign-funded enterprises and Chinese-funded enterprises to compete fairly for blue-chip quotas in order to maintain the representativeness of "local Hong Kong companies" and truly support the meaning of the HSI as a "representative of the regional stock market."
Taking a step back, the Hang Seng Index was not considered regionally representative before the reform, and the emphasis on "maintaining" regional representativeness during the reform was a joke.
When the Hang Seng Index repeatedly broke 30,000 points, Hong Kong's unemployment rate soared to a 17-year high, and the GDP for the whole year of 2020 fell by 6.1% year-on-year.
"The ability of Hong Kong's capital market to reflect local economic conditions is insufficient, or it may not have this intention at all." Liao Qun commented that Hong Kong, as an international financial center and a financing center for mainland enterprises, has a relatively large share of the capital market. Less is reasonable. "If most of them are local companies, the functions of the international financial center will gradually weaken."
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