Investing in China is proving increasingly popular with investors of all types who are seeking access to the growth phenomenon that the country represents.
A new initiative from the Hang Seng Indexes Company Limited (Hang Seng Indexes) gives investors a chance to access the economic power and growth that lies in China and its leading companies that are listed in Hong Kong.
March this year saw the company consult various types of firms, from fund managers to derivatives issuers, and data product users on enhancing the Hang Seng China Enterprises Index (HSCEI), making it better designed to meet their needs and make the index the ‘China index of the Hong Kong market’.
The results, according to Hang Seng Indexes, were that the majority of respondents supported the new initiative. The enhanced HSCEI will extend from comprising H-shares only to include both Red-chips and private mainland companies (P-chips).
The HSCEI enhancement details were based on the findings from the consultation project with input from the HSI Advisory Committee.
Hang Seng Indexes writes that P-chips are companies that have more than 50 per cent of their sales revenue (or profits or assets, if more appropriate) derived from mainland China but not H-shares or Red-chips.
Going forward, the index will be made up of 50 companies as the existing H-shares listing will remain at 40, and a new set of 10 will be added drawn from the Red-chips and P-chips universe.
According to the indicative data as at end of June 2017, market capitalisation coverage and turnover coverage of the HSCEI among all Hong Kong-listed Chinese enterprises would be enhanced after adding Red-chips and P-chips.
The enhanced index would have market capitalisation coverage of around 55 per cent, over the previous index, where market capitalisation stood at around 26 per cent. Turnover coverage would also be improved, with the newly enhanced index offering around 55 per cent coverage against the previous figure of around 37 per cent.
There would also be a significant rebalancing of sectoral coverage in the index according to the indicative data as at end of June 2017, with companies in the commerce and industry sectors nearly doubling from 21.3 per cent to 41.3 per cent. Against this, finance would be decreased from 70.5 per cent to 51 per cent.
There will also be additional eligibility screenings to establish the different risk profiles of Red-chips and P-chips, compared with H-shares, within the enhanced index. The selection criteria for H-shares will remain unchanged.
Additional eligibility screenings for Red-chips and P-chips will include a listing history of three years for companies listed through an IPO, or six years for those companies that have come through a back-door listing.
Another screening will be based on price volatility, looking at the past one-month, three-month and 12-month historical price volatility of a potential constituent which should not be more than three times the historical price volatility of the HSCEI for the respective period.
The final filter is financial, saying that the financial parameters of the company in the past three fiscal years in terms of profit, net cash generated from operating activities and cash dividends, must be greater than zero.
The additional 10 Red-chips and P-chips constituents will be selected in the index review with a data cut-off of end-December 2017 and a February 2018 announcement will be made together with the regular index review results.
There are funds and derivatives tracking the HSCEI. Assets under management in ETPs linked to the HSCEI are over US$7.7 billion as at end of June 2017. To minimise the potential impact on the market, the 10 new Red-chips and P-chips will be introduced to the HSCEI in five phases over a period of 12 months. The additional 10 constituents will be added to the HSCEI by adopting an inclusion factor and an adjusted cap level in each phase according to the following table:
