Market volatility sparked by fears of property developer Evergrande Group’s financial collapse has underlined how far political and commercial risks in China have risen, according to Steve Vickers, CEO of Steve Vickers and Associates (SVA).

In a report, the firm noted that “Evergrande’s plight is a neat illustration of the ‘grey rhinos’ (in terms of financial risk) warned of by President Xi Jinping.”

According to SVA, a specialist political & corporate risk consultancy, “companies should understand that the principal threats are now political, and should adapt quickly to protect their commercial interests.”

Local proprietors have previously expressed the view that the ongoing crisis would not have a direct impact on the SAR, as the real estate systems of China and Macau are different.

However, market concern lingers in China due to the possible collapse of one of its biggest real estate developers which is struggling to avoid default on billions of dollars of debt.

The debt ballooned as the group borrowed to finance its various pursuits.

According to data provider Refinitiv Eikon, Evergrande is the country’s most indebted developer, with more than USD300 billion worth of liabilities. This includes nearly USD20 billion in international bonds.

The property giant’s struggles have raised fears that it may destabilize China’s financial system and set off a global chain reaction.

The crisis is also the most significant fallout yet from the ruling Communist Party’s efforts to rein in surging debt levels that Beijing sees as a possible threat to the economy.

China’s Ministry of Housing and Urban Planning has already warned that the company might not pay up.

“Evergrande is struggling with a liquidity crisis, with potential implications for China’s entire property market,” SVA stated.

According to the firm, Evergrande’s plight will likely damage the broader economy – meaning that some kind of restructuring (even if not declared) is likely.

SVA noted that the property onshore obligations include wealth management products (about USD6.2 billion outstanding) and liabilities on pre-sales of apartments (about USD30 billion).

Some commentators suggest Evergrande might become China’s “Lehman moment,” referring to the collapse of the Wall Street bank Lehman Brothers, a forerunner to the 2008 crisis. However, economists say the risk of wider financial market contagion is low.

“The Chinese Communist Party prioritises stability, and risks of a Lehman-style collapse are just too high to permit such an event. So far, the Chinese government has yet to comment in full. Even so, any restructuring exercise will likely follow a well-trodden path,” the report said, taking the reorganization of bad banks in the late 1990s, or of the HNA Group and Anbang Insurance as examples.

“[In these examples], the government took control of the stricken businesses (sometimes indirectly), and carved them up, injecting capital into some units, and letting others fold – over a lengthy period, so as to manage any contagion,” it added.

According to reports, Evergrande was caught by tighter restrictions on borrowing imposed by Chinese regulators last year, as part of a campaign to reduce the economy’s reliance on surging debt.

The company has already sold billions of dollars of assets to meet government limits.

The implications for the broader economy are not yet clear, but surely will be significant.

According to SVA, “the government wishes to rein in speculation, albeit without provoking a collapse in housing prices.” The firm added that the CCP General Secretary Xi Jinping recently noted that “houses are for living in, not for speculation,” and is championing a “common prosperity” drive.

“As such, this shift is no ‘flash in the pan,’” it added.

SVA added that the government’s action against certain executives is probable as Evergrande founder Xu Jiayin has links to Jack Ma, and political ties at the highest level.

Xu was China’s richest entrepreneur in 2017, with a net worth of USD43 billion, according to the Hurun Report.

In a letter to employees on September 21, Xu expressed confidence the company will survive.

“Evergrande will surely get out of the darkest moment as soon as possible,” Xu said in the letter, marking the traditional Mid-Autumn Festival.

Meanwhile, SVA added that Xu could “come under pressure to divulge details of prior dealings, so as to provide leverage ahead of the 20th CCP Congress in the autumn of 2022; and associated lower level anti-corruption investigations will undoubtedly follow.”

“This will make the lead up to the 20th Party Congress a period of intense activity and cause some disruption to business,” the firm forecasts.

The group recommends companies reassess political risks in the property sector, take account of the changing investment climate, and factor in the policy priorities of the Chinese government, among other several measures.