Some big U.S. investors are looking past the potential failure of a massive Chinese property developer whose debt woes shook global markets this week, giving a vote of confidence to China as an investment destination despite the rising regulatory and political risks foreign investors increasingly face there.

As China Evergrande Group, one of the country’s biggest property developers, grappled with looming debt payments this week, its troubles prompted investors to take stock of their exposure to China. Economic growth once...

Some big U.S. investors are looking past the potential failure of a massive Chinese property developer whose debt woes shook global markets this week, giving a vote of confidence to China as an investment destination despite the rising regulatory and political risks foreign investors increasingly face there.

As China Evergrande Group, one of the country’s biggest property developers, grappled with looming debt payments this week, its troubles prompted investors to take stock of their exposure to China. Economic growth once looked unstoppable in China, but now faces a range of challenges, including lofty levels of corporate debt and a regulatory clampdown that has clipped the wings of some of its most prominent private business tycoons.

Market participants expect China’s government to let Evergrande default on at least some of its debt, leaving foreign investors to foot much of the bill. They also expect China to protect the many home buyers and suppliers the developer owes apartments and money to.

The likely default of Evergrande is being viewed by investors including Bridgewater Associates, a longtime China bull, Pacific Investment Management Co. and others as growing pains for China as it seeks to tamp down risks in its capital markets.

“In the short term, clearly there is a lot of potential for uncertainty and volatility,” said Christian Stracke, Pimco’s global head of credit research, in an interview. “But longer term this is something that needed to happen and will ultimately be good for the Chinese credit market.”

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The risk for China is that the knock-on effects of an Evergrande collapse could hobble its financial system, just as the government seeks to achieve more sustainable growth as it recovers from the pandemic. Some investors believe those risks have been overblown.

“The narrative in the media of this being ‘China’s Lehman moment’ doesn’t make sense,” Bridgewater said in a note on Tuesday. The firm said China’s banking sector was well positioned to absorb losses from an orderly default.

“The lack of a quick bailout will likely serve notice to investors that they need to do their due diligence and enforce accountability on debtors through that diligence,” Bridgewater wrote.

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Bridgewater founder Ray Dalio has close ties to China spanning decades and Bridgewater historically has counted Chinese institutions among its largest clients.

Markets have been jittery. On Monday, the S&P 500 and Dow Jones Industrial Average each fell nearly 2%. On Tuesday, U.S. markets were roughly flat, before rising Wednesday. The value of Evergrande’s Hong Kong listed stock has fallen about 85%. The Hong Kong-listed stocks of Chinese insurers and financial firms with exposure to property debt also sold off early in the week.

Evergrande said on Wednesday it would make an interest payment on an onshore bond due Thursday but didn’t say if it had plans to make a $83.5 million coupon payment due on its U.S. dollar bonds.

Some China bears including Jim Chanos have long sounded alarms about China, but Western investors have relied on China as a source of returns and diversification for a generation, due partly to its huge population and growing economy.

Beijing’s efforts to curb housing prices have worsened the cash crunch at the troubled property developer Evergrande.

Photo: Qilai Shen/Bloomberg News

Funds with stakes in Evergrande debt include those of Fidelity International, UBS Asset Management, Amundi Asset Management SA, and BlackRock Inc.

BlackRock has long argued that global investors aren’t putting enough money into China given the country’s growth, and stands by that view. But in the case of Evergrande, BlackRock’s fund positions in Evergrande debt reflect a lack of enthusiasm in the property developer’s bonds, and the firm isn’t actively adding exposure, said a person with knowledge of the situation.

Several firms have been sellers of Evergrande bonds, causing the debt to trade at steep discounts. Amundi whittled down most of its fund positions in Evergrande debt in recent months, according to a person familiar with the matter. Meanwhile, Allianz Global Investors sold its funds’ debt positions in Evergrande over the past few months, said another person familiar with the matter.

Allianz said in an investor note that the developments around Evergrande “reaffirm our negative view on the property sector as a whole,” but added “we are not expecting a broader-based impact.”

Mr. Chanos, of veteran short selling fund Kynikos Associates, has numerous bearish bets on China’s economy and has profited in the recent decline, said a person familiar with the matter.

The risks stemming from China’s markets stem far beyond debt and real estate. A continuing regulatory campaign has targeted Chinese technology giants including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. over issues including alleged anticompetitive practices, data security and other matters. Alibaba’s shares in Hong Kong are down by about a third year to date while those of Tencent—the maker of the popular WeChat app in China—are down by more than 20%.

Several “macro” hedge funds that invest based on their views of big-picture market movers like the economy, politics and regulation have started betting against China in recent months as the wave of regulatory surprises has continued, investors said. One view is that political infighting in China leading up to an important Communist Party meeting slated for late next year could mean more shocks to come for investors.

At next year’s party congress, Chinese President Xi Jinping is expected to seek to remain in power, effectively breaking the party’s established system of leadership succession.

Mr. Xi, China’s most powerful leader in decades, has emphasized a greater role for the state in seeking to distribute wealth more equitably. His government’s efforts to curb housing prices have worsened the cash crunch at the troubled property developer Evergrande.

“It’s hard to invest in China’s future if they’re turning against capitalism,” said Ed Yardeni, president of sell-side research firm Yardeni Research Inc.

For decades, investor George Ball believed that having a healthy percentage of client portfolios in China was a must. Its huge, fast-growing economy was a draw, as was the domestic brainpower he believed would help fuel that growth for years to come.

But the continuing regulatory crackdown in China led Mr. Ball and the investment team at Houston investment firm Sanders Morris Harris to keep clients’ stock exposure to China to about 4% earlier this year when the stock market sold off, rather than rebalancing to get back to their typical 7% exposure.

“We felt for years that having representation in China was mandatory for almost anyone’s portfolio,” said Mr. Ball, 82, chairman of Sanders Morris Harris which, with its parent company Tectonic Financial, manages $4.7 billion in assets for wealthy individuals. “But the country being governed in a very overreaching fashion is a major worry for us, and then if you compound it with Evergrande being a symbol of overleverage in the economy there, it simply exacerbates our concern.”

Truist Advisory Services, which advises on and manages assets for wealthy individuals and institutions, cut its China exposure in August on the heels of Beijing’s taking aim at the for-profit education sector as well as weak corporate earnings in China compared with in the U.S.

“What we’re seeing here is an important structural shift in how China is managing its economy and its markets,” said Keith Lerner, the business’s co-investment chief.

He said he expects the government to manage Evergrande’s default to avoid a hard landing, but that he continues to hold a more negative view toward China. “There is uncertainty around who’s next in the crosshairs,” he said.

The questions swirling around Evergrande and Chinese stocks this week come as the U.S. and China have faced severe strains in their diplomatic relationship, on everything from trade policy to China’s record on human rights. Confronting China is one of the few issues about which lawmakers on both sides of the aisle in Congress appear in agreement.

In the coming few years, Chinese companies traded on U.S. exchanges could be forced to delist their shares after a new law passed in 2020 that requires foreign companies to have audits inspected by U.S. regulators.

With China’s growing prominence in emerging-markets indexes, many Americans’ exposure to Chinese companies such as Evergrande has grown, sometimes without their knowledge if they don’t track their fund holdings. Over the past few years, many emerging-market funds have boosted their holdings of Chinese stocks despite the rising geopolitical tensions with the U.S. That is because the indexes they mirror have increased China exposure.

Amid the turbulence this week, some investors said they still were looking for buying opportunities, particularly as the Evergrande troubles shook out and hit related firms.

“Industrial companies exposed to Chinese property, banks and property management companies may be worth adding to based on contagion from Evergrande,” said Louis Lau, director of investments at Brandes Investment Partners.

He isn’t surprised to see what’s happening with China’s leveraged property developers. “It’s a train wreck that has been happening in the last two years,” he said.

—Charley Grant contributed to this article.

Write to Brian Spegele at brian.spegele@wsj.com, Juliet Chung at juliet.chung@wsj.com and Dawn Lim at dawn.lim@wsj.com