The Hong Kong government plans to create a closed-end fund tracking the blue chip Hang Seng as a way to begin selling off its stock portfolio recently valued at 220 billion Hong Kong dollars ($28.4 billion), as early as November.
The government accumulated its position during a period of massive intervention last August to support the market following Russia's default on debt. Concern that authorities would unload these holdings directly has dogged Hong Kong stocks for months; relief that the shares won't be dumped into an unwilling market sent the Hong Kong benchmark index soaring upwards after the government's announcement on June 21, 1999.
The government wouldn't say what portion of its holdings would be packaged in the new fund. But Marian Li, chief executive of Exchange Fund Investment Ltd., the institution formed to oversee the portfolio, said much of the portfolio is likely to be sold off in incremental steps. More than 20% is likely to be retained for long-term investment purposes, Exchange Fund Investment officials said. The government's huge portfolio, acquired in August for HK$118 billion, comprises about 10% of local market capitalization. Exchange Fund Investment expects to hire a private fund company to manage the portion of the government's holdings that won't be repackaged into a mutual fund or sold off in some other way.
The exact timing of the launch will depend on market conditions, Li said. The new fund will be listed on the Hong Kong exchange and have a minimum unit price that would entice participation by retail investors. Other investor incentives might also be provided.
This puts the government in the unenviable position of competing with private fund managers who offer Hang Seng Index funds. But officials familiar with the plan say that the new fund -which will track the 33 stocks in the Hang Sang index - won't appeal to all investors since it won't pay dividends. Rather, these officials liken the new fund to Standard & Poor's Depositary Receipts that track the S&P 500 composite index, trade on the American Stock Exchange and are redeemable in blocks for shares approximating the index.
Many financial professionals are also skeptical of the soundness of the government-sponsored investment product. Their major concern is that the fund - like the Hang Seng Index that it will track - is too narrow in scope for new investors.