What happened

Shares of Chinese companies named "Evergrande" are having a topsy-turvy day today. China Evergrande Group (EGRN.F -33.33%), the real estate giant that's been making headlines over the past year, was down 14% by 11:33 a.m. EDT on Thursday. And while shares of its China Evergrande New Energy Vehicle Group (EVGR.F 3.64%) started the day by soaring 55.5%, they later followed the real estate company down, dropping by 11%!

Red arrow going down crosses a green arrow going up

Image source: Getty Images.

So what

China Evergrande proper is plummeting on reports that the Chinese government has instructed local governments "to prepare for the potential downfall of China Evergrande Group," as The Wall Street Journal put it today.  

Evergrande has a big debt payment coming due today, and while the government has urged Evergrande to pay its bills if it can, no one's 100% certain that this will be possible. If Evergrande misses its payment, it will have a 30-day grace period to rectify the oversight. But if the real estate company turns out to be well and truly insolvent, analysts are suggesting the central government will not step in to bail it out.

China's instructions to its subsidiary governments, therefore, aren't that they attempt to save Evergrande, but rather devote their efforts to "preventing unrest and mitigating the ripple effect on home buyers and the broader economy," the Journal reported.

Now what

China Evergrande New Energy Vehicle Group is a sub-subsidiary of China Evergrande proper, according to S&P Global Market Intelligence, China Evergrande New Energy Vehicle is the company's EV business that's trying to cash in on the global rush toward electric cars.

As it turns out, China Evergrande New Energy Vehicle is also a potential pawn in the broader China Evergrande bankruptcy saga. As Reuters reported last month, China Evergrande proper has been negotiating to sell all or part of its EV company to a consortium of smartphone maker Xiaomi and other interested buyers, in order to raise cash to pay off some of the parent company's debts.  

There's just one problem with that: At the time Reuters reported this, China Evergrande New Energy Vehicle was valued at $12.5 billion. It's worth closer to $3.9 billion after this morning's run-up and collapse. China Evergrande Group is not negotiating from a position of strength right now. Even if it does manage to sell the EV company, it's likely to end up with a fire-sale price. And the gains that China Evergrande New Energy Vehicle shareholders enjoyed this morning didn't last very long.