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 Sunday.

 

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 the institutional buyers cautious about acquiring non-index stocks, Deng said in a phone interview from Hong Kong. It could lead to the inclusion of companies including China Construction Bank Corp and Angang New Steel Co.

 

Hong Kong's Hang Seng Index is made up of 33 stocks reflecting 70 percent of the market's capitalization. Before the February 10 announcement, it had been limited to Hong Kong-based companies, including so-called red chips, local units of mainland companies.

 

China Construction Bank, Angang New Steel, China Shipping Development Co and ZTE Corp satisfy 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 US$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-percent 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 (CSRC) 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 per cent, 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 users, and CNOOC Ltd, China's largest offshore oil and gas producer.

 

(China Daily February 14, 2006)