Shares in Asia swung between gains and losses in the wake of Wall Street’s worst one-day fall in four months, as investors braced for the possibility of a default by Chinese property developer Evergrande.

Shares in Japan sold off sharply on Tuesday, after being closed on Monday for a public holiday, with the benchmark Topix index dropping 1.7 per cent on rising fears of contagion from Evergrande’s liquidity crisis. Hong Kong’s Hang Seng index shed as much as 1.4 per cent before pulling back to be flat, after having finished Monday more than 3 per cent lower.

Evergrande, the world’s most indebted developer, reversed early gains in morning trading and was down more than 5 per cent, after closing more than 10 per cent lower on Monday. The stock has dropped more than 85 per cent this year.

The turmoil at Evergrande has shaken markets this week, as global investors grapple with the prospect that Beijing could allow the leverage-fuelled group to default. Such a move would upend long-held expectations that Chinese authorities would intervene to protect systemically important but financially distressed companies.

The ruptures sparked a global equities sell-off on Monday, pummelling shares in Europe and driving down all but 50 stocks on the S&P 500, which finished the day 1.7 per cent lower. The Nasdaq Golden Dragon index of big US-listed Chinese companies closed down 5.4 per cent.

Pressure on property developers that were responsible for much of China’s economic growth — along with most of Asia’s high-yield dollar debt issuance — has also mounted ahead of a crucial deadline for Evergrande on Thursday, when it faces an $83.5m interest payment on one of its bonds.

Judy Zhang, an analyst at Citi, warned that while Beijing would probably be able to mitigate the spillover from Evergrande’s debt crisis, more than 40 per cent of Chinese banks’ assets were related to the property sector.

“We do not see the Evergrande crisis as China’s ‘Lehman moment’ given policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk,” Zhang said, referring to the market turmoil that followed the collapse of Lehman Brothers in 2008.

But she added that credit risk from exposure to debt-laden Chinese developers was highest for lenders including Minsheng Bank, Everbright Bank and Ping An Bank, a subsidiary of insurance group Ping An, whose shares fell as much as 8.4 per cent on Monday. Hong Kong-listed Minsheng and Everbright are both down about 6 per cent this week.

The spectre of a China-driven crunch also triggered concerns that any prolonged uncertainty could lead the Bank of Japan to buy exchange traded funds for the first time since June to support the market.

Despite the savaging of sectors such as industrials that were perceived to be vulnerable to a Chinese property crisis, dealers said Japan was trading as more of a haven.

A leadership race to determine the next prime minister and the possibility of a huge stimulus package was providing solid support to the Tokyo market, said Takeo Kamai, CLSA’s head of execution. A protracted rout of Chinese equities could also convince global funds to rotate investments into Japan, he added.

Markets in China remained closed for a national holiday on Tuesday but in Singapore, FTSE China A50 futures, which are used to hedge exposure to stocks listed in Shanghai and Shenzhen, were flat in morning trading after finishing Monday’s session 3 per cent lower.