HONG KONG — Chinese technology companies Alibaba Group Holding, Xiaomi and Meituan Dianping have been cleared to be included in Hong Kong’s main share index under new rules adopted on Monday, in a move that will also reduce the financial domination of the five-decade-old benchmark gauge.
Companies from the greater China region — which covers the mainland, Hong Kong, Macao and Taiwan — with a secondary listing in the city or with shares carrying different voting rights are eligible to be included in the index beginning in August.
Such companies can represent a maximum of 5% each of the Hang Seng Index and the Hang Seng China Enterprises Index, two of the most-tracked equity benchmark indexes on the Hong Kong Stock Exchange, the Hang Seng Indexes Co., the administrator, said in a statement.
The decision comes after a consultation that drew 58 responses from banks, insurers, analysts, brokerage firms and asset managers. More than 90% of the respondents were in favor of including such stocks, it said.
“This was a move expected when Alibaba did its secondary listing in Hong Kong late last year,” Hao Hong, head of research at Bocom International said. “The index is filled with financial stocks, and including technology stocks marks a better representation of the Chinese economy now. While index funds will have to buy these stocks now, it wouldn’t matter to active managers as they should have maximum allocation to these stocks already.”
Alibaba’s Chairman and CEO Daniel Zhang, Vice Chairman Joseph Tsai, former Hong Kong Chief Executive Tung Chee-hwa and others attend Alibaba’s listing ceremony at the Hong Kong Stock Exchange on Nov. 26, 2019.
© Reuters
Alibaba has its primary listing on the New York Stock Exchange and a secondary listing in Hong Kong. Smartphone maker Xiaomi and Meitun Dianping, China’s largest food delivery company, have primary listings in Hong Kong and dual class shares. Alibaba also is considered dual class as a select group of current and past senior managers can nominate a majority of the board.
Morgan Stanley, in an investors’ note before the announcement, estimated passive fund flows of $3.7 billion into the three stocks. The Hang Seng Index is tracked by 23 exchange-listed products with listings on 10 stock exchanges around the world, representing more than $20 billion. It is also tracked by retirement funds in Hong Kong that manage $8 billion.
There are 11 financial-services shares in the 50-constituent Hang Seng Index, representing a 48.47% weighting. Tencent Holdings was the sole tech stock, with an 11.29% weighting as of the end of April.
The Hong Kong Stock Exchange in 2018 changed its rules to allow companies with dual class shares to list. Since then, the three Chinese tech companies have made their Hong Kong debut and are among the most traded stocks by value.
Other Chinese tech companies, including JD.com and Baidu, are considering secondary listings in the city, people familiar with their plans have said.
Shares with weighted voting rights will be considered as non-free float shares — those with different voting rights and those held in lieu of an overseas depositary receipt — and a company’s market capitalization will be based solely on the Hong Kong-registered portion of its shares, the statement said.
Respondents in the consultation did not see “significant differences” in the risk profiles of primary and secondary listed companies, the Hang Seng Indexes said. Ninety-six percent of respondents considered market representativeness as the most important selection criteria for HSI constituents, it said.
The changes to the equity index notwithstanding, Alibaba is still not part of the Stock Connect program. Stock Connect allows mainland investors to buy shares in Hong Kong and international investors to buy mainland listed shares through the Hong Kong Stock Exchange.
The exclusion of companies with secondary listings and weighted voting rights from the program was part of an arrangement agreed to by the mainland and Hong Kong exchanges before Alibaba’s Hong Kong debut, Bloomberg reported, citing people with knowledge of the matter.