China Braces for Social Unrest After Evergrande Collapse: Report

China is asking local governments to prepare for possible "economic and social fallout" should Evergrande Group—the world's most heavily indebted property developer—become bankrupt in the coming weeks, according to the The Wall Street Journal.

The company's stock picked up on Thursday as investors appeared to be buoyed by news that its main subsidiary, Hengda Real Estate Group, would meet a $35.9 million interest payment on an onshore bond due on September 23. In a filing with the Shenzhen Stock Exchange, Hengda said it had struck a last-minute deal through "private negotiations."

But Beijing is showing no signs that it will bail out Evergrande from its $300 billion in liabilities. It's bracing the nation and the world's second-largest economy for what officials have termed a "possible storm," the Journal reported on Thursday.

The real estate titan faces two more deadlines for interest payments in the next seven days. An overseas bond payment of $83.5 million is also due on September 23, and another $47.5 million in interest is due on September 29. It has a 30-day grace period to settle the outstanding payments.

Last week, Evergrande informed investors that it wouldn't be able to meet its financial obligations. Should the group default and file for bankruptcy, "local-level government agencies and state-owned enterprises have been instructed to step in to handle the aftermath," the newspaper said.

Local officials have been "tasked with preventing unrest and mitigating the ripple effect on home buyers and the broader economy," the Journal added.

"Local governments have been ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande's operations in their respective regions, talk to local state-owned and private property developers to prepare to take over local real-estate projects and set up law-enforcement teams to monitor public anger and so-called 'mass incidents,' a euphemism for protests," the paper said.

Excessive Borrowing

Evergrande employs some 200,000 people across the country and is responsible for creating 3.8 million jobs a year. It has been plagued by financial woes and a months-long stock selloff due to excess borrowing and cashflow problems.

In a letter to staff sent as China celebrated the mid-autumn festival holiday over the weekend, the group's chairman, Hui Ka Yan, tried to rally morale by promising his employees a solution.

"I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible," the 62-year-old said.

Financial analysts are debating whether Evergrande's potential demise could be China's "Lehman moment," triggering a financial crash that could heavily impact the United States and the global economy.

According to Brooking Institution senior fellow David Dollar, a mismanagement of Evergrande's aftermath could also spell trouble for China's ruling party.

China Evergrande Group Faces Financial Demise
This file photo taken on September 17, 2021, shows the halted under-construction Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development in China. VIVIAN LIN/AFP via Getty Images