Perhaps we’d better start inoculating ourselves now, fiscally speaking. The collapse of the Evergrande Group in China could crash Beijing’s economy, and by extension the global financial system, if it entirely defaults as expected. Even if Xi Jinping steps in to bail out Evergrande, the ripple effects might still be substantial:

Evergrande Group built a real estate empire on a mountain of debt. Now the Chinese property giant is in trouble — and there are fears it might take the global economy down with it.

The uncertainty fueled a market sell-off this week and has raised concerns of a crisis similar to the one set off in 2008 by the collapse of the U.S. investment bank Lehman Brothers. Experts say such comparisons are overblown, not least because the Chinese government exerts a much greater degree of control over even private companies like Evergrande.

But the developer’s predicament could deal a serious blow to the world’s second-biggest economy as Beijing faces what may be one of its largest defaults.

Evergrande rode a construction boom created by government incentives and flush-with-cash Chinese entrepreneurs operating with Beijing’s imprimatur. They helped build massive projects that they sold before completion to investors, then took the cash — and lots and lots of debt — to leverage more construction, which then led to more leveraging, and so on.

That’s not a classic Ponzi scheme, as NBC News suggests, but it’s nearly as bad. It’s more akin to Wall Street in 1929 just before the margin calls started coming. And this margin call is especially dire:

It also amassed $300 billion in debt, equivalent to about 2 percent of China’s gross domestic product, making it the world’s most indebted developer. Now a slowing property market and the ruling Communist Party’s efforts to remake the Chinese economy have forced a reckoning with Evergrande’s issues.

Sales are down. Construction on some projects has been halted over delayed payments. And the company’s offices in China have been besieged for weeks by angry protesters, many of them employees, who worry they may not recover their investments in Evergrande properties and financial products.

How did it get this bad? Evergrande is a publicly traded company, after all, and has to undergo routine audits and reporting. Today’s Wall Street Journal wonders about that too, and the answer sounds familiar after the 2007-8 financial crash. Jean Eaglesham reports that Pricewaterhouse Cooper oddly appears to have missed all this risk in its last review, instead assuring investors that all was well:

Last year as China Evergrande Group’s EGRNF -11.25% stock and bond prices seesawed, it offered deep discounts to keep sales growing during the pandemic and the government effectively said it had borrowed too much.

Yet the property developer’s auditor gave it a clean bill of health in an annual report issued this spring.

Now, Evergrande is teetering on the edge of financial collapse, weighed down by an $88.5 billion debt burden and total liabilities in excess of $300 billion. The company has hired financial advisers, pointing to a likely restructuring, and Beijing is telling local officials to prepare for its potential downfall.

When Evergrande’s auditor, PricewaterhouseCoopers in Hong Kong, signed off on the company’s 2020 financial statements, it didn’t include a so-called going concern warning. These red flags from an auditor show that it has doubts about the company’s ability to stay afloat for at least 12 months.

Now their bondholders are waiting to see whether Evergrande can make a scheduled interest payment on its debt. That $83.5 million payment is due now, on just $2 billion of its overall debt. They have a grace period of 30 days, but everyone’s getting nervous now that the music has stopped — and are wondering whether any chairs are left at all.

Beijing’s instruction to local officials are making them even more nervous about China’s willingness to avoid a collapse:

Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group, EGRNF -11.25% according to officials familiar with the discussions, signaling a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company’s travails.

The officials characterized the actions being ordered as “getting ready for the possible storm,” saying that local-level government agencies and state-owned enterprises have been instructed to step in to handle the aftermath only at the last minute should Evergrande fail to manage its affairs in an orderly fashion. …

China’s top financial regulator, the Financial Stability and Development Committee, earlier this month told provincial governments to set up working groups to monitor social and economic instability around Evergrande, some of the people said. The Evergrande situation comes ahead of a closely watched leadership meeting next year.

That makes it sound as though a bailout is not in the cards. Investors will be left holding the very extensive and expensive bag for a potential $300 billion loss, likely with few or no assets to seize as China reallocates real property by fiat. That could upend investment firms and portfolios, amplifying effects across the rest of the economy for the next several years.

An Evergrande collapse may not impact the US directly, but Fed chair Jerome Powell told CNBC that it could impact the US economy indirectly. Powell seems confident that the effects of a $300 billion bond collapse will be minimal here. Given the inordinate embrace of debt in the US among corporations and individuals, it’s tough to share that optimism or to be as sanguine as Powell about the implications of Evergrande. Viruses from China turn out to be more transmissible than initially thought these days.