BEIJING - The
inclusion of mainland-based companies in Hong
Kong's benchmark index will make it easier for
overseas investors to buy mainland companies'
stocks, some strategists and fund managers said on
February 12.
The decision by HSI Services
Ltd to include H shares in the Hang Seng Index
from later this year will help the index reflect
Hong Kong companies'
increased investment in the mainland, said
Mark
Simpson, head of research at Macquarie Securities
Ltd in Hong Kong.
"The impact is really
going to be the greater integration of the two
capital markets," said Agnes Deng, who helps
manage US$1.2 billion at Standard Life Investments
Asia in Hong Kong. "From the investor's point of
view, the Hong Kong stock market becomes more
correlated with the Chinese mainland economy."
The change will make it easier for
overseas investors to buy the shares, especially
institutional buyers cautious about acquiring
non-index stocks, Deng said in a phone interview
from Hong Kong. It could lead to the inclusion in
the index of companies including China
Construction Bank Corporation and Angang New
Steel.
Hong Kong's Hang Seng Index is made
up of 33 stocks, reflecting 70% of the market's
capitalization. Before the February 10
announcement, it had been limited to Hong
Kong-based companies, including the so-called red
chips, local units of mainland companies.
China Construction Bank, Angang New Steel,
China Shipping Development Co and ZTE Corp satisfy
the new guidelines for inclusion, Hong Kong's
Standard newspaper said on February 11, citing HSI
Services General Manager Vincent Kwan.
To
qualify, a mainland company must have all its
shares traded on a stock market, HSI Services
said. Mainland companies are in the process of
making tradable more than $200 billion in mainly
government-owned stock that previously couldn't be
sold. Many H-share companies have or are planning
secondary local-currency listings in Shanghai.
Under this rule, China Construction Bank,
the country's third-largest lender, is probably
the company now most suited for inclusion in the
index, said Bruce Richardson, head of research at
Evolution Securities China Ltd in Shanghai. "When
they came into the market, they had already
completed their share reform, so there was no
government overhang, there was no 70% government
ownership there," Richardson said. "The shares
were fully tradable." Mainland investors are not
allowed to buy shares in companies listed in Hong
Kong.
The China Securities Regulatory
Commission plans to encourage companies traded
overseas to sell shares at home, seeking to revive
benchmarks that fell to eight-year lows last year,
according to a draft document sent to brokerages.
Air China Ltd, the nation's biggest airline, and
PetroChina Co, its top oil producer, have H-share
listings and no domestic shares.
The Shanghai and Shenzhen
stock exchanges were the world's fourth- and
third-worst performers in 2005 because the
smaller, state-owned manufacturers that dominate
those markets did not drive the world's
fastest-growing major economy.
Of the
other three companies mentioned by HSI Service's
Kwan, only ZTE is large enough to warrant
inclusion in the benchmark index, Macquarie's
Simpson said. The company's combined Hong Kong and
Shenzhen market capitalization is about US$3.5
billion, he said. Angang New Steel and China
Shipping have capitalizations less than that of
Johnson Electric Holdings Ltd, which will be the
smallest company in the index after Denway Motors
Ltd is dropped next month, he said.
"HSI
Services still has to decide what criteria it will
use to determine membership in the index," Simpson
said. Still, "the relevancy of the index to the
market has improved, reflecting Hong Kong's
growing exposure to the mainland." Simpson said he
doesn't expect a flood of money into Hong Kong as
a result of the potential inclusion of H shares.
Joining the index may cause a stock to increase
about 2%, he said.
Ten of the 33 index
companies are Hong Kong-based units of mainland
companies, or red chips. These include China
Mobile (Hong Kong) Ltd, the world's biggest
cell-phone operator by number of users, and CNOOC
Ltd, China's largest offshore oil and gas
producer.
