Mainland China companies that want to raise funds have various options at their disposal. These include listing on Mainland, a developing market dominated by local retail investors, and Hong Kong, a well-developed market with international exposure.
A considerable number of large Mainland companies have chosen to list in both Hong Kong and on the Mainland. Such companies are collectively referred to as ‘AH Companies’. However, some of the industry leaders are only listed in a single market – for example, China Mobile is only listed on the Hong Kong Stock Exchange, while KweiChow Moutai, a renowned wine producer, is only listed on the Shanghai Stock Exchange.
As at 30 November 2016
Given this reality, a China-themed index that covers only a single market does not accurately represent the whole of China as an investment concept. For example, an index that only tracks the performance of A-shares would have very limited exposure to the telecommunications sector as the largest companies in the sector are not listed on the A-shares market. The same would apply to an index that only covers Mainland companies listed on the Hong Kong market. Companies in the consumer goods and industrials sectors, which are an important part of the Mainland economy, would be underweighted as the industry leaders tend to be listed on the A-shares market.
Reflecting the China market in a comprehensive manner requires a cross-border index that covers both the A-shares market and the Hong Kong market. This was one of the rationales behind the development and launch of the Hang Seng China 50 Index in 2008.
Fig 1. Selection Process
* Hang Seng China (Hong Kong-listed) 100 Index (‘ML100’) selects top 100 largest Hong Kong-listed Mainland stocks in terms of full market capitalisation and freefloat-adjusted market capitalisation.
^A300 list includes the top 300 largest A-shares with aggregate turnover ranked within the top 90th percentile of the market.
The Hang Seng China 50 Index (‘China 50 Index’) is constructed by selecting the top 50 companies across the three exchanges (i.e. Shanghai Stock Exchange, Shenzhen Stock Exchange and the Stock Exchange of Hong Kong) in terms of the aggregate market capitalisation of all share classes. All of a constituent company’s Hong Kong and Mainland-listed share classes are included in the index. As at 30 November 2016, 17 constituent companies were listed only on the Mainland and nine constituent companies were listed only in Hong Kong. The remaining 24 companies were AH Companies, resulting in a total of 74 constituent shares in the index. As at the end of the third quarter of 2016, the total market capitalisation of the 74 constituent shares was approximately RMB19 trillion, covering over 30 per cent of the total market capitalisation of all Mainland companies listed on Mainland and Hong Kong stock exchanges.
As at 30 November 2016
Including all the share classes of companies in an index is generally not desirable as there is a risk that it will put too much weight on one particular company, which, accordingly, would increase the index’s company-specific risk. To mitigate this risk, a 10 per cent weighting cap is applied to each constituent company.
Since the China 50 Index includes Mainland and Hong Kong stocks, it is exposed to market risk from both markets. At the same time, however, its coverage of both markets means that if one market significantly underperforms the adverse impact on the index may be somewhat mitigated by the performance of the constituent stocks in the other market. This characteristic enables the index to deliver a relatively more stable return when compared to other single-market indexes such as the Hang Seng China Enterprise Index (‘HSCEI’) and the Hang Seng China A Top 100 Index (‘HSCAT100’), which reflect the performance of large Mainland companies listed in Hong Kong and on the Mainland respectively. In general, the index return of the China 50 Index in recent years has been between the returns of the other two indexes and it has often recorded a lower annualised volatility.
Fig 2. Index Return and Volatility
Following the launch of Shenzhen-Hong Kong Stock Connect, more A-shares are now accessible to investors in the Hong Kong market. With cross-border strategies potentially becoming more widely adopted in the future, the Hang Seng China 50 would be worthy of investors’ attention if they have intention to construct cross-market portfolio.
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.
