Hang Seng uproar as China SOEs barred

HONG KONG, China (CNN) -- Controversy has erupted over the decision to omit two of China's largest state-owned companies from Hong Kong's main Hang Seng share index .

Mainland oil giants PetroChina and Sinopec, two of the biggest companies listed in Hong Kong, have been barred from joining the blue-chip index.

The administrator of the index, HIS Services, ended weeks of speculation by omitting the two companies because of their status as H shares -- that is, shares of mainland China-owned companies listed in Hong Kong.

The move has sparked a debate over the criteria for inclusion in the Hang Seng.

"H shares are a different class of share," HIS Services general manager Vincent Kwan Wing-shing was quoted saying by Hong Kong newspaper The South China Morning Post.

"The companies are registered in China and come under Chinese company law," he said.

Shares down on news

PetroChina shares were down 2.92 percent and Sinopec were down 1.71 per cent by midday in Hong Kong as investors sold on the news.

The Hang Seng Index comprises 33 stocks, and forms a benchmark on which many institutional investors construct their portfolios.

"There is an element of controversy, because people have expected some of the mainland enterprises to be brought into the Hang Seng and clearly this decision puts that on the backburner," says Robert Sassoon, head of research at SG Securities in Hong Kong.

PetroChina and Sinopec would add great weight to the Hang Seng, with market values respectively of $29.4 billion and $12.3 billion. Analysts expect PetroChina to turn a net profit this year of about $6.6 billion, and Sinopec about $2.4 billion.

Confusion will continue

"There is always going to be a question mark over whether the Hang Seng should be representative of the Greater China or simply domestic Hong Kong stocks."

Some mainland companies, including China Mobile, China Resources Enterprise and Shanghai Industrial Holdings, have been included in the Hang Seng Index because they are classified as "red chips".

Red chips are Hong Kong-based companies which control mainland assets, while companies listed with H shares operate as mainland entities and conduct their business under separate rules.

Some observers believe the controversy is much ado about nothing, since most equity strategists follow the Morgan Stanley Capital Index (MSCI) ahead of the Hang Seng.

"There will be some marginal selling of PetroChina and Sinopec, but it's not such a big deal unless there are many funds that track the Hang Seng," says Bangkok-based Nomura Securities energy analyst Adam Clarke.

HSI Services

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