Hong Kong Stocks Face Major Adjustment!

The Hong Kong Stock Exchange has recently conducted its quarterly review of the Hang Seng Index series, announcing significant changes that reflect the evolving dynamics within the marketThese adjustments, effective from March 10, 2024, following the market's close on the preceding Friday, will see Tencent Music and Horizon Robotics included in the Hang Seng Tech Index, while Oriental Selection and ZhongAn Online are set to be removed.

Additionally, the Hang Seng China Enterprises Index will experience minor modifications, welcoming ZTO Express and BeiGene while dropping China National Pharmaceutical Group and Li NingThe comprehensive Hang Seng Index, however, will see a more substantial shift, with its constituent stocks dropping from 517 to 505. Although there are no changes to the constituents of the Hang Seng Index itself, some individual stock weights will be adjusted accordingly.

Since the beginning of the current bullish market trend on January 14, the Hang Seng Index has surged by over 24%, with the Hang Seng Tech Index posting an even more impressive gain of nearly 39%. Notably, stocks such as HuaHong Semiconductor and Alibaba Health have skyrocketed by over 80%, while Alibaba itself has risen by 77%. Other prominent stocks, including SMIC, Xiaomi Group, BYD Electronics, and XPeng Motors, also saw increases surpassing 50% during this period.

On February 23, Hong Kong's Financial Secretary Paul Chan announced that a new budget would be presented the following WednesdayIn his blog, he stressed that utilizing public resources effectively is essential for sustainable social development, improving citizens' livelihoods, and enhancing efficiency

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Chan indicated that the upcoming budget would propose a reinforced "fiscal integration" strategy to manage public spending strictly while still maintaining and improving social servicesHe also mentioned a careful approach to bolstering Hong Kong's competitiveness and a flexible use of public resources to accelerate development and invest in the future.

Acknowledging the complexity of the international environment, Chan emphasized the importance of seizing future development opportunities, particularly those driven by technological advancementHe noted that innovations emerging from the tech sector could fuel economic growth, drive the transformation of traditional industries, and develop new economic momentum, suggesting that a proactive approach amidst uncertainty presents pathways for sustainable economic development.

The results of this quarterly review hold substantial weight for the market and investors, primarily due to the considerable amounts of passive trading that these index changes will invokeThe Hang Seng Index Company, responsible for managing and compiling the Hang Seng Index series—which includes the Hang Seng Index itself, the Hang Seng China Enterprises Index, and the Hang Seng Tech Index—has seen tremendous growth in the value of funds tracking its indices.

As of late February, the data indicates that products tracking the Hang Seng Index series boast a total asset value of approximately $75.6 billion, underscoring the significant market movements tied to these quarterly reviews.

On February 21, the Hang Seng Index Company announced the quarterly review results, revealing that while there were no changes to the 83 constituent stocks of the Hang Seng Index, some individual weight adjustments were notable

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Specifically, HSBC's weight dropped from 8.28% to 8.00%, while weights for other major players like China Construction Bank and Industrial and Commercial Bank of China saw increases.

For the Hang Seng Tech Index, Tencent Music and Horizon Robotics have been added, replacing Oriental Selection and ZhongAn OnlineThe number of constituent stocks remains at 30, but adjustments in weights have occurred across the board, indicating a broader trend where Meituan's weight increased significantly, mirroring the positive market sentiment surrounding technology stocks.

Similarly, the Hang Seng China Enterprises Index underwent minor reshuffles, with ZTO Express and BeiGene coming on board and the removal of China Biologic Products and Li NingThe total constituents are capped at 50, with variances in weights demonstrating shifting investor interests.

The comprehensive Hang Seng Index illustrated more drastic changes, with its constituent stocks declining from 517 to 505. Noteworthy additions included companies like Multi-Point Intelligence and iFlytek, while significant players such as Naixue's Tea and KEEP were excised from the index.

These weight adjustments are closely monitored by market participants, particularly those running exchange-traded funds (ETFs) that track the indices, necessitating buy and sell adjustments based on these changesAnalysts have identified Meituan as one of the big winners in this quarterly review, with expectations of notable inflows into ETFs as its weights get adjusted upwards in both the Hang Seng Technology Index and the China Enterprises Index.

According to institutional insights, China's asset value reassessment continues amid rapid market movements

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The secondary market remains buoyant, with the Hang Seng Index nearing a 4% gain this week and the Technology Index exceeding 6.5%. The sustained rally since mid-January coincides with broader trends of stock appreciation and stakeholder optimism.

Investment banks Goldman Sachs and Morgan Stanley have revised their outlooks for key Chinese stock indices for 2025, citing faster adoption of artificial intelligence as a potential economic growth driver that justifies higher valuations.

Experts like James Cook, emerging markets investment director at Federated Hermes, highlight advancements in AI as a critical catalyst for investors to reevaluate their perspectives on China and its robust growth potentialSignificantly, a surge in hedge fund inflows into Chinese stocks underscores renewed interest driven by AI developments.

Recent reports from the International Institute of Finance confirmed vigorous foreign investment in Chinese assets, with overseas investors pouring over $10 billion into Chinese stocks and bonds in January alone, marking a significant return to market involvement since August of the previous year.

Amidst a backdrop of capital outflows from emerging markets outside of China, the distinctive appeal of Chinese stocks has emergedThey attracted a net inflow of $2 billion in January, highlighting the ongoing market differentiation and strength drawn from localized growth metrics.

Analysts at Shenwan Hongyuan emphasize that the reassessment of Chinese asset values is ongoing, with the technology sector driving a significant portion of the broader market's growth

The performance of tech indices has consistently outperformed others, reflecting investor enthusiasm for innovation and technology-driven economic models.

Haitong Securities has expressed optimism regarding China's technological ascendancy, noting favorable conditions across macroeconomic and market structuresThe foundation for this growth rests on improved innovation efficiency and supportive capital market policies that collectively augment the landscape for tech giants in China.

Anticipation exists for the emergence of new innovation leaders akin to China's "Big Seven," notably within the realms of AI application, semiconductors, and advanced manufacturing, indicating a vigorous commitment to driving future economic transformation in the country.