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Southbound trading link of Stock Connect

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On 16 August 2016, the China Securities Regulatory Commission in mainland China and the Securities and Futures Commission in Hong Kong jointly announced the approval of the establishment of Shenzhen-Hong Kong Stock Connect. 

After the launch of Shenzhen-Hong Kong Stock Connect, Mainland investors will be able to place orders to trade eligible shares listed on the Stock Exchange of Hong Kong (SEHK). Eligible shares include constituent stocks of the Hang Seng Composite LargeCap Index (HSLI) and the Hang Seng Composite MidCap Index (HSMI), any constituent stocks of the Hang Seng Composite SmallCap Index (HSSI) which have a market capitalisation of HKD5 billion or above, and all SEHK-listed shares of companies which have issued both A shares and H shares. 

Hang Seng Composite size indexes

The HSLI, the HSMI and the HSSI are sub-indexes of the Hang Seng Composite Index (HSCI) – a comprehensive Hong Kong market benchmark that covers about 95 per cent of the total market capitalisation of companies listed on the main board of the SEHK. As at 31 October 2016, the HSCI, with 475 constituents, covered 88.0 per cent and 91.4 per cent of total market capitalisation and October 2016’s turnover respectively. 

The HSCI is sub-divided into three size indexes: the HSLI (101 constituents), the HSMI (196 constituents) and the HSSI (178 constituents), which cover the top 80 per cent, the next 15 per cent and the remaining 5 per cent of the total market capitalisation of the HSCI respectively. 

Exposure not available in the Mainland Stock Markets

Through the southbound trading link, Mainland investors are able to get exposure which is not available in the Mainland stock markets, i.e. Hong Kong companies (e.g. HSBC, AIA); Red-Chips, such as China Mobile and CNOOC; P-chips, such as Tencent and AAC Tech; and H-shares without an A-share listing, such as China Telecom and PICC P&C. As at 31 October 2016, 406 out of the 475 constituents of the HSCI did not have listings on the Mainland stock markets. 

In addition to the existing eligible stocks under Shanghai-Hong Kong Stock Connect, under Shenzhen-Hong Kong Stock Connect, Mainland investors can invest in some Mainland SmallCap companies that are only listed on the SEHK. As at 31 October 2016, there were 95 eligible SmallCap companies eligible under Shenzhen-Hong Kong Stock Connect. 

Different sector distribution

As shown in Exhibit 1, as at 31 October 2016, Financials was the largest industry in the HSLI, with 45.5 per cent of the index weighting, while only accounting for 14.9 per cent and 3.9 per cent of the index weightings in the HSMI and the HSSI respectively. The HSMI and the HSSI were more evenly distributed in terms of industry distribution, with Consumer Goods, Properties & Construction and Industrials being the three largest industries in the HSMI and the HSSI as at 31 October 2016. 

Exhibit 1. Industry Distribution

Performances of different size indexes since launch of Shanghai-Hong Kong Stock Connect

Between the announcement date of Shanghai-Hong Kong Stock Connect on 10 April 2014 and 31 October 2016, the HSLI and the HSMI slid by 2.8 per cent and 2.0 per cent respectively, much less than the 18.2 per cent drop in the HSSI. However, between 16 August 2016 (the announcement date of Shenzhen-Hong Kong Stock Connect) and 31 October 2016, the HSSI outperformed the other size indexes, recording a positive return of 1.1 per cent while the HSLI and the HSMI delivered returns of 0.6 per cent and -1.4 per cent respectively. 

Hang Seng Stock Connect Hong Kong Index Series – An investable benchmark

On 5 December 2016, the Hang Seng Stock Connect Hong Kong Index Series was launched in order to provide an investable reference set for investors from the Mainland. Constituents with a market capitalisation of less than HKD5 billion in the HSSI and real estate investment trusts are excluded from the universe to mimic the investable basket available to Mainland investors through the southbound trading link of the Stock Connect. Additional screenings of a one-month listing history and turnover requirements are applied to ensure the tradability of the index series. 

The index series currently includes three indexes: the Hang Seng Stock Connect Hong Kong Index (HSHKI), the Hang Seng Stock Connect Hong Kong MidCap & SmallCap Index (HSHKMS) and the Hang Seng Stock Connect Hong Kong SmallCap Index (HSHKS), which reflect the performance of eligible stocks, MidCap & SmallCap, and SmallCap segments respectively under the southbound trading link after tradability screenings. As at 5 December 2016, there were 338, 241 and 77 constituents in the HSHKI, the HSHKMS and the HSHKS respectively. 

The above article was prepared by Hang Seng Indexes Company Limited.
 


Disclaimer
Investments involve risks. Information provided herein is for information and reference only and does not constitute nor is it intended to be construed as any professional advice, offer or solicitation to deal in any of investments mentioned herein. The past performance is not indicative of future performance.

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