China is tightening approvals for shantytown renovation projects in a bid to fend off local government financial risks and avoid a housing bubble, sources familiar with the matter said.

China Development Bank, one of major policy banks in charge of shantytown development projects in China, is expected to tighten approvals for funding of shantytown renovation projects, but no restrictions have been imposed on ongoing projects, said a source with the bank, who asked not to be identified.

Further details for funding approvals remain under discussion, the source said.

Another source in charge of shantytown projects in the northwestern Shanxi province confirmed that current projects have been implemented "as scheduled" and they are yet to receive any notice to halt the projects.

"A complete halt for future funding approval is not likely because shantytown renovation is one of the key projects that the central authorities consider to be important," the source working on projects in Shanxi province said. "But it is not surprising to see a further tightening trend because the earlier massive expansion of credit issuance might lead to financial risks－no one knows how local governments spend the money."

Local governments face "relative high pressure" as they continue to promote shantytown projects while trying to repay debts and curb the incremental debts amid efforts to fend off financial risks, according to a report released by the Ministry of Finance in May.

China Development Bank said in a response on Monday that shantytown projects have been implemented in a normal manner, and the bank has provided 436.9 billion yuan ($66.48 billion) worth of policy loans by the end of May, without elaborating on further details.

China plans to revamp 5.8 million shantytown homes this year, according to the annual government work report.

Yan Yuejin, research director at E-house China R&D Institute, said the tightening approval trend will help improve the efficiency of loans expected to flow into renovation projects.

"While tightening the screws on future policy loans issuance, policymakers will probably issue more supportive measures to help encourage housing rentals because such moves will help rein in speculative sales," he added.

An index of property stocks went down by 2.69 percent after the market closed on Tuesday.