Hang Seng revamps benchmark index to open door for Alibaba

By Kiuyan Wong and Jeanny Yu

Hong Kong’s Hang Seng Index will include dual class shares and secondary listings, allowing Chinese giants such as Alibaba Group Holding into the city’s benchmark to provide a potential boost for passive investors who have for years struggled with lackluster returns.

Hang Seng Indexes Co., announced the long-awaited change on Monday in Hong Kong, a step that will help move the benchmark away from a heavy dominance of financial shares. Dual class and secondary listings will each be subject to a 5% weighting cap.


The move came after “overwhelming market support,” HSI said. Any changes will come into effect during the August 2020 index review and encompass only companies coming from Greater China.

The shift will affect about $30 billion in pension fund assets and exchange-traded funds that track the index, and could spur a flood of local share sales by U.S.-listed firms. Dual class shares were long blocked from listing in Hong Kong due to concerns over the unequal voting rights until Xiaomi Corp. became the first in 2018. Alibaba joined the bourse last year after a $13 billion secondary listing.

Meituan Dianping, China’s largest food-delivery website, is also a potential candidate for inclusion, while JD.com Inc. is considering a secondary listing of its own in the city.

“It’s a bit surprising to me that Hang Seng caps the market weight at 5%,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai Co. “But it’s understandable, since the indexer might want to take it step by step to avoid a sudden change on the Hang Seng Index, since each tech firm is relatively very big by market cap.”

Wen expects the cap to lifted eventually to 10%, “but it won’t happen in the next 3 to 6 months.”

About half of the total weighting of the Hang Seng Index is in financial firms, compared with about 15% on average for benchmarks in Europe, the U.S., Japan and mainland China, according to data compiled by Bloomberg. The gauge has gained 1.7% a year on average in the past decade, versus 5.2% for the MSCI All-Country World Index. In January, the Hang Seng approached its lowest level relative to the MSCI measure since 2004.

HSI said that any shares that carry weighted voting rights, typically those held by the founders of the company, will be considered as non-freefloat, and not eligible for the index. While for secondary listings, any shares held as overseas depositary receipts will be ineligible.

Separately, the HSI consultation conclusion also said no additional limits will be placed on financial stocks.

Managers of passive index pension funds will now have to follow the adjustment to include weighted voting rights shares, said Michael Chan, managing director of Hong Kong-based Gain Miles MPF Consultant Ltd. Despite institutional concerns over the corporate governance issues of dual class share companies, which gives some shareholders more weight than others, Chan said it won’t create much stir locally since retail investors are largely indifferent to how their pension money is placed.