China’s fiscal stimulus is already tapering as bond sales shrink amid government shift towards risk control

China’s local authorities have slowed the pace of debt sales to finance infrastructure projects this year, evidence of a gradual tightening of fiscal policy as the government shifts its focus toward risk control.

Local governments have sold or plan to sell 222.7 billion yuan (US$34.3 billion) of so-called special bonds in January to April to fund shanty town renovations, highways and other infrastructure investment, according to data compiled by Bloomberg. That’s a sharp decline from 729.6 billion yuan of debt sold in the same period in 2019 and 1.15 trillion yuan in 2020.

Investors have been on guard for signs of monetary and fiscal tightening given the economy’s strong recovery from the pandemic slump and the government’s shifting of its attention to tackling debt. While an interest rate hike by the central bank is still a distant prospect, the drop in bond sales suggest a quiet scaling back of fiscal support.

There’s been an aspiration to “steady debt growth, or even make it fall from last year,” said Zhou Hao, economist at Commerzbank AG in Singapore. Policymakers are looking for a “restrained pace of economic growth” so that they can reduce the reliance on fiscal stimulus as long as the economy keeps humming, he said.

Beijing cut the full-year quota for local government bond sales only moderately this year, allowing them to sell 3.65 trillion yuan of special infrastructure bonds. Yet unlike the usual practice of speeding up debt issuance at the start of a new year to maximise the impact, local governments have made slow progress so far, using funds carried over from last year to finance projects.

While the latest data showed local authorities have accelerated the sale of infrastructure debt this month, some analysts argue that as long as the economic rebound is firm, the funds may just be kept in reserve.