“Policymakers would choose to wait first, then step in later to ensure an orderly debt restructuring,” he said. “A wholesale bailout is not very likely and shareholders/lenders might take a big loss. But the government would make sure that the pre-sold apartments get done and delivered to homebuyers.”

Hu also pointed to the Chinese government’s recent track record in restructuring giants such as Anbang Insurance, Baoshang Bank, HNA Group and China Huarong Asset Management. “China’s banking system has an annual profit of 1.9 [trillion yuan] and a provision of 5.4 [trillion yuan], which could easily absorb the loss from Evergrande,” he said.

‘China has the tools,’ IMF says
In Evergrande’s case, the property developer has more direct ties to foreign investors than the bulk of China’s economy.

The company has about $19 billion in total offshore bonds outstanding, equivalent to about 9% of U.S. dollar-denominated Chinese bonds, according to investment bank UBS. Evergrande’s total liabilities of about $313 billion is about 6.5% of the total liability of China’s property sector, the report said.

The UBS analysts expect Evergrande to restructure its debt, and predict that bond prices will recover from their lows and limit contagion.

The analysts also laid out a range of possible spillover effects if Evergrande were to enter the less likely scenario of full liquidation, such as the failure of exposed banks and selling across emerging market credit.

International Monetary Fund Chief Economist Gita Gopinath told Reuters this week the organization believes “China has the tools and the policy space to prevent this turning into a systemic crisis.”

The IMF can organize bailouts for countries or regions in financial stress.

Evergrande stock in Hong Kong
Year-to-date moves in HKD

Even though public government statements in recent months have called for preventing major financial risks, Chinese authorities’ intervention is not a given.

Chinese officials have so far made few major public statements about Evergrande.

At a press conference last week, a National Bureau of Statistics spokesman said the department is monitoring the difficulties of some large real estate companies and the potential impact on the economy.

China’s real estate market, along with related industries such as construction, accounts for more than a quarter of national GDP, according to Moody’s estimates.

Bets that property prices would only rise ultimately forced many Chinese households to take out mortgages to afford homes. In the last few years, the government has tried to cool the market with measures such as restrictions on the level of debt developers can take on.