One portfolio manager said that China’s property developers may be subject to greater scrutiny for violating environmental laws as Beijing intensifies its efforts to strengthen rules. 

Chinese authorities have ordered the indebted property developer to be repaid. China EvergrandeTo demolish 39 buildings of its Ocean Flower Island project came as a surprise to many, said Teresa Kong, head of fixed income at investment firm Matthews Asia.

It caught investors and the company by surprise, I think. The government has been very vocal about implementation of environmental policies,” she told CNBC’s “Squawk Box Asia” on Wednesday.

Ocean Flower Island, a man-made archipelago located in Danzhou (Hainan), is called “the largest of its type” by the Chinese state media. According to Wall Street JournalThe government of Danzhou stated last month that Danzhou had caused widespread harm to coral reefs and that it had damaged the marine environment.

Kong said it may not just be Evergrande that could have skirted the environmental rules — but “potentially other property developers as well.”

“The environmental wildcard is one that we should consider — not only for developers, but also for many other industries that under scrutiny, as China really does step up in terms of environmental protection,” noted Kong. 

Evergrande was China’s second-largest developer, in sales terms, in 2020. The largest Chinese real-estate developer is by the issuance of U.S. dollar denominated offshore debt last year, at $19 million. This developer had an overall of $300 billion in liabilities as of last year and was on the brink of collapse.

Kong said that China’s laws on environmental protection aren’t new. She added that China is increasing its efforts to implement the laws and companies who don’t follow them strictly will be “getting the kind of scrutiny they deserve”.

Evergrande stated Tuesday that it will continue communication with creditors and work to mitigate risks.

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

Kong, in spite of China’s problems with the company, remains optimistic about China’s long-term property sector.

“If you look at where China is in terms of urbanization rates, it just reached the 60% mark,” she said,  adding it is still far below the U.S and Japan. 

“So from a long-term perspective, the property sector still has lots of growth. Kong stated that the property sector is so important for China’s GDP.

— This report was contributed by Evelyn Cheng, CNBC.