CHINA’S roaring bond engine is stalling heading into the new year, posing a quandary for policymakers as they try to curb leverage while keeping economic growth on track.

    Bond issuance in December by Chinese companies and banks is 142 billion yuan (US$20.4 billion) less than the amount of notes they must repay this month. That’s set for the biggest monthly gap on record.

    As borrowing costs soar, firms have canceled or postponed at least 117.5 billion yuan in bonds, up from 29.7 billion yuan in November. That’s dragged total issuance down to 266 billion yuan, less than a third of November.

    “Such a small amount of bond sales will be a blow to corporate financing,” said Wu Sijie, a senior trader at China Merchants Bank Co. “There needs to be a balance between the policy of deleveraging and companies’ demand for fundraising. It’s hard. The regulators need to draw a fine line.”

    The dilemma for policymakers is this: How to rein in runaway debt of zombie firms, while not disrupting the financial lifeblood for productive companies. Authorities have championed the bond market in recent years as a more transparent, well regulated alternative to shadow banking and it had been thriving. Even after the slump in issuance, total note sales this year are already at a record 8.9 trillion yuan from 8.3 trillion yuan in 2015.

    The economy is ending the year on a bright note with industrial output expanding and retail sales accelerating. Authorities have used that improvement as an opportunity to trim leverage, increasing short-term money market rates and tightening rules on using debt as collateral to buy even more securities. That pushed companies’ borrowing costs up to the highest in 19 months.

    “If liquidity remains so tight, financing costs for the whole real economy will be very high, which is unsustainable,” said Wang Shen, a fund manager at Bosera Asset Management Co.

    While taking steps to rein in risky investments, policymakers have also moved to assuage market panic. The People’s Bank of China on Tuesday asked some lenders to provide funds to the market via the so-called X-Repo system, which allows members to submit bids for repurchase contracts anonymously, according to people familiar with the matter. (SD-Agencies)