Old out, new in: China market gets a shake up

Consumer stocks are in and heavy industry is out in a shake up of the two most important equity indices listed in Hong Kong.

China Mengniu, the mainland dairy producer part-owned by Danone, will join Hong Kong’s best known index, the Hang Seng 50, following a review of its constituents completed this week.

Mengniu will replace China Coal Energy next month, in a symbolic shift for an index long dominated by banks and industrials, which investors have shunned due to doubts about their prospects in an era of change to the way that China grows.

The performance of the two stocks, and their relative sectors, is stark. While China Coal has dropped more than 50 per cent in the past year, Mengniu has risen 76 per cent, as investors look to tap consumption-reliant stocks. China is hoping to shift its economy away from fixed asset investment and exports, which has pushed investors into technology and retail stocks – such as dairy producers.

Hang Seng Indexes will also add the battery-maker turned car manufacturer BYD to the China Enterprises Index – a grouping of mainland Chinese companies listed in the city. It will replace Zoomlion Heavy Industry, which makes construction equipment, and is a favourite among short-sellers.

The changes in the offshore market echo the diverging fortunes onshore of China’s two main stock markets – Shenzhen and Shanghai.

The Shanghai Composite remains China’s largest and most watched equity market. But with the index heavily dominated by state-owned financials, energy companies, and heavy industry, investors have shied away. Since the start of 2013, the Shanghai market has fallen 5 per cent.

In contrast, the Shenzhen market – home to stocks TV maker TCL – has jumped by a third, while the ChiNext – a Nasdaq-like index of small startups in tech and healthcare – has more than doubled.

The changes to both the HSI and HSCEI are small. Mengniu is just one of 50, and BYD one of 40 stocks on their respective indices. More changes will be needed.

But it’s a step in the right direction. Investors have bemoaned the poor link between China’s growth drivers and China’s listed market, while the rising use of ETFs as a means to tap equities makes the index composition all the more important.

Both BYD and Mengniu rallied on Thursday morning – but investors should be cheering, too.