Introduction To The Hong Kong Stock Exchange

The Hong Kong Stock Exchange (HKEx) is the 2nd largest exchange in Asia, after the Japan Exchange Group. It is part of the Hong Kong Exchanges and Clearing Limited (HKG:0388) (0388 196.90 +0.60 +0.31%). The exchange has also been the top destination for initial public offerings in the past few years. At the end of March 2017, the exchange is home to 2,009 listed companies with a total market capitalization of HK$27.2 trillion (USD3.5 trillion). It is also one of the most liquid exchanges in Asia, with an average daily turnover around HK$74 billion.

Its benchmark index is known as the Hang Seng Index (HSI). Some of the largest and most actively traded companies on the exchange includes:

Why Should You Invest On The HKEx?

Just by looking at the list above, you will realize that the top companies on the Hong Kong Stock Exchange are not always Hong Kong-based. In fact, the exchange is dominated by many large-cap Chinese companies, commonly known as H-shares.

Most major public corporations in China have a listing status in Hong Kong. This includes companies in the financial sector, technology sector, property sector and even the oil and gas sector. This was because the Shanghai and Shenzhen Stock Exchanges were only accessible by the local population. Therefore, Hong Kong Exchange is the only domestic exchange that companies can list on to access foreign capital.

According to the exchange, at the end of 2016, 29.6% of the market capitalization of its main board. Other large sector includes properties and construction (13.99%), consumer goods (11.22%) and information technology (10.2%).

HKEx Hang Seng
Hong Kong Stock Exchange Market Cap. Distribution 2016

Source: Hong Kong Stock Exchange

Therefore, if you are interested in investing in China, Hong Kong Stock Exchange can be a great starting point for you. It helps you gain access to the top corporations in China like Tencent Holdings (0700 276.80 -0.40 -0.14%), Bank of China Ltd (HKG:3988) (3988 3.88 0.00 0.00%) and PetroChina Company Limited (HKG:0857) (0857 5.26 -0.08 -1.50%). Even Warren Buffett invested on the Hong Kong Exchange through Berkshire Hathaway Inc’s (NYSE:BRK.A) (NYSE:BRK.B) (BRK.B 165.30 +0.37 +0.22%) investment in BYD Company Limited (HKG:1211) (1211 44.60 +0.35 +0.79%).

Recently, the Hong Kong Exchange announced the tie-up with Shanghai and Shenzhen Exchanges. This allows foreign investors to invest into the Shanghai and Shenzhen market. It also allows the Chinese investors to access companies on the Hong Kong Stock Exchange.

The Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect are two major developments that have significantly increased the accessibility for investors within the region.

There Are Traps To Be Aware Of

However, with so many companies listed on the exchange, investors would need to be very selective. Stock manipulation is not uncommon on the exchange. And investors looking at the small-cap segment need to be very careful of the liquidity of a stock. Especially when the exchange is not only famous for the listed large Chinese companies, it is famous for having many paper billionaires as well. These are major shareholders of very illiquid companies which have seen their share prices soar through the roof. They might be billionaires on paper, but not in reality.

You might need to take note of such issues if you are interested in investing on the Hong Kong Stock Exchange.

The Takeaway

Hong Kong Stock Exchange offers great opportunities for investors to gain access to the Chinese market. Now with both the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect, investors are able to invest directly in even greater Chinese companies.
However, we need to understand that it is still a marketplace and we have to take in the good and the bad. There are incidents of many unethical behaviours of some market participants on the exchange. We need to be aware of those issues and not to fall prey into them.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. 

Stanley Lim, CFA

Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer for the upcoming investment book: “Value Investing In Asia”, scheduled to be published late 2017. Stanley is currently the chief editor of Value Invest Asia.

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