Hang Seng Indexes Under Pressure as Funds Avoid Chinese Stocks

(Bloomberg) -- Hong Kong's index provider is facing increasing pressure to comply with a U.S. ban on investments in Chinese companies that populate its benchmarks.

Hang Seng Indexes Co. was in the spotlight Monday after State Street Global Advisors Asia Ltd. said its $14 billion Tracker Fund won't make any new investments in sanctioned securities. The exchange-traded product -- the largest in Hong Kong -- is popular among the city's savers and is also the most actively traded in the secondary market. Its mandate is to mirror the performance of the Hang Seng Index.

The Hong Kong index provider stands out as the only major compiler that's yet to remove sanctioned Chinese companies from its benchmarks. The firm said last week it had no plans to do so, though it would monitor “market developments” closely. Its widely followed Hang Seng Index and Hang Seng China Enterprises Index feature stocks banned by the U.S. from Monday, including telecom firms China Mobile Ltd. and China Unicom Hong Kong Ltd.

The issue shows how Hong Kong is getting caught between powerful political forces in Washington and Beijing, complicating its role as a global financial center. U.S. sanctions on the city's leader Carrie Lam has meant she's shut out from basic banking services, the stock exchange operator is struggling to find a new chief, while statements by the local government increasingly resemble those by China's ministry of foreign affairs.

“Hang Seng Indexes has a tough decision to make,” said Paul Pong, a managing director at Pegasus Fund Managers Ltd. He bought China Mobile shares during last week's selloff. “Local investors will want these stocks in their ETFs -- China Mobile has a good dividend yield, for example. But others won't be able to own Hang Seng ETFs if the sanctioned names remain in the indexes.”

Hang Seng Indexes, a wholly-owned unit of lender Hang Seng Bank Ltd. -- itself a subsidiary of HSBC Holdings Plc -- didn't immediately reply to an email seeking comment on State Street's decision. Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. also said they will delist 500 warrants and callable bull/bear contracts in the city, the world's largest market for structured products.

Hang Seng Indexes currently publishes about 950 gauges, according to its website. There were 76 exchange-traded products tied to its indexes, Hang Seng Bank's latest annual report showed, with listings on 17 venues around the world as of 2019. About $36 billion of funds invested in those products, while 125 million futures and options contracts followed the HSI and HSCEI, according to the report.

Hong Kong Exchanges May Face Wider U.S. Delisting Fallout: React

American peers MSCI Inc. and S&P Dow Jones Indices, as well as London-based FTSE Russell, have kicked out securities to comply with the U.S. sanctions. Confusion over the vaguely worded executive order triggered wild swings and historical volume in Hong Kong shares of China Mobile, China Unicom and China Telecom Corp.

Shares of the three firms rose Monday, following evidence of heavy buying from mainland-based investors on Friday.