Hang Seng Index Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The Hang Seng Index (HSI) is the internationally recognized stock market indicator of the Stock Exchange of Hong Kong (SEHK). The HSI is a free-float capitalization-weighted index of selected companies listed on the Hong Kong exchange. The index was developed on July 31, 1964, with an initial base level set at 100 for its 30 constituent companies. The HSI was launched as a public service in 1969. The Hang Seng Index is compiled, published, and managed by the Hang Seng Indexes Company Limited, a wholly owned subsidiary of Hang Seng Bank, itself a principal member of the Hongkong and Shanghai Banking Corporation (HSBC). The Chinese characters for Hang Seng translate as “ever growing.”

Constituent stocks of the HSI are selected by a rigorous process of analysis. Only companies with a primary listing on the main board of the Stock Exchange of Hong Kong are eligible as components of the Hang Seng Index. Companies in the index play significant roles in the Hong Kong economy as evidenced by the listing requirements: A company must be among those companies that constitute the top 90 percent of the total market value of all eligible shares listed on the SEHK (market value is expressed as an average of the previous 12 months); and must be among those companies that constitute the top 90 percent of the total sales revenue of all eligible shares listed on the SEHK (sales revenue is aggregated and individually assessed for eight quarterly sub-periods over the previous 24 months); and should normally have a listing history of at least 24 months or meet the requirements of a schedule of combinations of market value and listing period.

The Hang Seng Composite Index aims to cover 90 percent of the market capitalization of stocks listed on the main board of the Stock Exchange of Hong Kong. There are currently 200 stocks on the exchange. Constituent stocks must not have more than 20 trading days without sales revenue in the preceding 12 months, excluding days when the stock is suspended from trading (“Turnover Screening”); and after the Turnover Screening, the top 200 stocks in terms of average market capitalization in the previous 12 months are selected as constituents.

The final selection of companies in the HSI is based on the following additional criteria: the market value and sales revenue ranking of the companies; the representation of the sub-sectors within the HSI reflecting the market; and the financial performance of the companies.

Total market capitalization of the HIS stands at about HK$15,000 billion or 10 times the gross domestic product of Hong Kong. The companies (currently 43) in the HSI are divided into four sub-indexes representing particular economic sectors: Commerce and Industry, Finance, Properties, and Utilities. Some of these companies are Hutchinson Whampoa (commerce and industry), the Bank of East Asia (finance), Cheung Kong (properties), and CLP Holdings (utilities).

The Hang Seng Index Composite is calculated as follows:

HSI t = { Σ [ SPt * IS * FAF * CapF ] / Σ [ SPt-1 * IS * FAF * CapF ] } * HSI t-1

where:

HSI t = current Hang Seng Index

HSI t-1 = previous closing Hang Seng Index

SP t = the current day’s share price

SP t-1 = the previous day’s closing price

IS = number of issued shares

FAF = free float-adjustment factor

CapF = capitalization factor

As of July 8, 2008, the value of the Hang Seng Index was 23,872.43. Its 52-week high was 24,195.32, and its 52-week low was 23,858.89.

Mainland enterprises (currently 45 companies) that have an H-share listing in Hong Kong are also eligible for inclusion in the Hang Seng Index (HSI) when they meet any one of the following conditions: (1) the H-share company has 100 percent of its ordinary share capital in the form of H shares that are listed on the SEHK; (2) the H-share company has completed the process of Share Reform, with no unlisted share capital in the company; or (3) for new H-share initial public offerings (IPO), the company has no unlisted share capital.

Other Hang Seng Indexes

The Hang Seng Composite Index Series is composed of 18 indexes to gauge the performance of the Hong Kong stock market from different perspectives. In addition to the Hang Seng Composite Index, there are six indexes based on geographical status and market capitalization of the constituent stocks, and 11 indexes based on industry classification.

The Hang Seng Indexes Company appoints an independent advisory committee composed of Hong Kong experts drawn from government, universities, legal professionals, accounting professionals, and investment consultants. The independent advisory committee meets at least four times a year to discuss the composition of the indexes and issues relating to the indexes.

The Hang Seng Composite Industry Indexes cover the following 11 industry sectors: Conglomerates, Consumer Goods, Energy, Financials, Industrial Goods, Information Technology, Materials, Properties & Construction, Services, Telecommunications, and Utilities.

Other important Hang Seng indexes include the following: Hang Seng Hong Kong Composite Index: constituents of the Composite Index that derive the majority of their sales revenue from Hong Kong or places outside mainland China; Hang Seng HK LargeCap Index: top 15 stocks by market capitalization in the Composite Index; Hang Seng HK MidCap Index: companies ranked 16th to 50th in the Composite Index by market capitalization; Hang Seng HK SmallCap Index: companies ranked 51st and below in the Composite Index by market capitalization; Hang Seng Mainland Composite Index: constituents of the Composite Index that derive at least 50 percent of their sales revenue from mainland China; Hang Seng China-Affiliated Corporations Index: non-H share in the Hang Seng Mainland Composite Index with at least 30 percent shareholding by mainland entities such as state-owned organizations, provincial or municipal authorities.

There are also three “Prime Indexes,” each with a smaller number of companies, that are designed to facilitate the development of index-derivative products: the Hang Seng 50, the Hang Seng HK 25, and the Hang Seng Mainland 25.

Bibliography:

Kam C. Chang, Louis T. W. Cheng, and Peter P. Lung, “Net Buying Pressure, Volatility Smile, and Abnormal Profit of Hang Seng Index Options,” Journal of Futures Markets (v.24/12, 2004);
Joseph K. W. Fung, Donald Lien, Yiuman Tse, and Yiu Kuen Tse, “Effects of Electronic Trading on the Hang Seng Index Futures Market,” International Review of Economics and Finance (v.14/4, 2005);
Hang Seng Indexes Company Limited, www.hsi. com.hk (cited March 2009);
Raymond W. So and Yuiman Tse, “Price Discovery in the Hang Seng Index Markets: Index, Futures, and the Tracker Fund,” Journal of Futures Markets (v.24/9, 2004).

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