Hang Seng Compiler Defends Creation of Hong Kong Quota

The compiler of the Hang Seng Index defended its decision to create a quota for Hong Kong firms in the latest overhaul, saying maintaining a local presence in the city’s most widely followed stock index will continue to be important.

“We are in Hong Kong and we are talking about the Hong Kong stock market,” Anita Mo, chief executive officer of Hang Seng Indexes Co. said in a Bloomberg Television interview. “In the Hang Seng Index, we need to preserve the elements for Hong Kong.”

Hang Seng Compiler Defends Creation of Hong Kong Quota

The Hang Seng Index will be enlarged to 80 members by mid-2022 from 55 this month. Of those, at least 20 will be Hong Kong companies. Mo, who succeeded two-decade veteran Vincent Kwan at the helm of the index compiler in September, said a company’s “business presence” in the city would help define whether it’s considered a Hong Kong firm -- such as where it derives the bulk of revenues.

The city’s bourse is being flooded by large-cap mainland Chinese companies, especially from the tech sector, which has made the finance-heavy Hang Seng Index look outdated. The gauge’s historical performance has been lackluster, despite a recent rally, especially against the MSCI China Index. Some $38 billion is invested in funds that follow the Hang Seng group of indexes.

Hang Seng Compiler Defends Creation of Hong Kong Quota

Hang Seng Indexes is a a wholly-owned subsidiary of Hang Seng Bank Ltd., which is in turn controlled by HSBC Holdings Plc.

Hong Kong is finding it increasingly hard to distinguish itself from the mainland as Beijing’s influence increases in the wake of a national security law. The city disappeared from a global economic freedom index it used to top, being grouped together with China instead. Hong Kong lost its special status with the U.S. last year, with the former Trump administration saying the city was no longer autonomous from mainland China.

The Hong Kong presence on the 51-year old gauge has receded over the years, reflecting the growing might of mainland Chinese companies on the bourse. Swire Pacific Ltd., one of the founding members of the index and a British-run firm, was removed in November, while Chinese tech firm Meituan was added.

Hong Kong has become the preferred venue for a wave of Chinese megacaps to sell shares, such as Kuaishou Technology, which surged 161% on its debut last month. Under the overhaul, new stocks will need just three months of trading before they’re up for inclusion, regardless of market cap. That’s down from as many as two years.

Support for the retention of Hong Kong firms was muted. Of the 60 respondents in Hang Seng Indexes’s consultation, 33 said they supported keeping a certain number of Hong Kong companies. Some 16 had no preference, and 11 said they had reservations about the proposal.

Among concerns raised, some questioned whether the move would be unfair to some mainland companies, and that the Hang Seng Index should represent the overall stock market in the city regardless of where a company generates its business, according to the consultation results.

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