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China property developers might face greater scrutiny: Portfolio manager

China property developers might face greater scrutiny: Portfolio manager

One portfolio manager said that China’s property developers could be subject to greater scrutiny if they violate environmental laws. Beijing is increasing its efforts to strengthen rules.

The latest order by Chinese authorities to order China Evergrande, an indebted property development company, to demolish 39 buildings of itsOcean Flower Island projects came as a surprise for many, according to Teresa Kong, head, fixed income at Matthews Asia.

“I think it caught both the company and investors by surprise. Thegovernment has been very vocal regarding implementation of environmental policy,” she said to CNBC’s Squawk Box Asia on Wednesday.

The Ocean Flower Island is a manmade archipelago that can be found in Danzhou (Hainan), and is called by Chinese state media “the largest of its type.” According to Wall Street JournalThe government of Danzhou stated last month that the island had harmed our marine environment and was partially responsible to widespread coral reef destruction.

Kong suggested that it could not have been Evergrande who had evaded environmental regulations, but rather “potentially other property owners as well.”

Kong stated that “The environmental wildcard” is something we should consider for developers as well as for many other industries that have come under review, since China really does step up when it comes to environmental protection.

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Evergrande is China’s second largest real estate developer, in terms of sales, and the largest Chinese real-estate developer by issuances of offshore, U.S. dollars-denominated bonds, which stood at $19 million last year. As of last year, the developer had $300 billion in total liabilities and was at risk of collapse.

Kong said that China’s environmental protection laws were not new. She added that China is increasing its efforts to implement the laws and companies that don’t follow them strictly are “getting a lot of scrutiny.”

Long-term, the property sector still has a lot of growth potential. It is an important sector in China’s overall GDP.

Evergrande also stated Tuesday that it “will continue actively maintain communication with creditors and strive to resolve risk and protect the legitimate rights and interest of all parties.”

S&P Global Ratings in November warned that an Evergrande default was “highly likely” as the company is no longer able sell new homes.

Despite the company’s problems, Kong is still bullish on China’s property sector long-term.

“If we look at China’s urbanization rate, it just passed the 60% mark,” she said, adding that it is still well below the U.S. or Japan.

“So the property sector has a lot of potential for growth in the long-term.” It is an important sector for China’s overall GDP,” Kong stated.

This report was contributed by Evelyn Cheng, CNBC.

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