China is likely to increase its budget deficit and ease credit controls in 2016 in order to support economic growth, the draft budget which began review over the weekend suggests. The level of support, and the areas where it will be focussed, may mean there is only a small impact on steel demand, however, Kallanish notes.

A key figure that many commentators have focused on is the increase in China’s budget deficit to 3% of gdp, from 2-2.5% over the last several years. The increase to just over CNY 2.2 trillion ($342 billion) suggests more government spending and therefore boosts the prospect of stimulus, although it is still lower than some analysts had been predicting.

However, a steel market analysis of China’s budget should focus on spending for infrastructure. Even if, as some analysts are suggesting, China actually pushes its budget deficit to 4% by the end of the year, that means a deficit of just under CNY 3 trillion. The Ministry of Finance has estimated that tax breaks for corporations, a key strategic goal for the next five years, could mean savings for companies of up to CNY 500 million in 2016.

That leaves CNY 2.5 trillion. Weak consumption figures and land sales volumes suggest that tax revenues may be down from the previous year, meaning that will also take up part of the deficit increase. Another large chunk of government revenue will also likely go into support for managing local government debts.

On balance, even a 4% increase in the budget deficit could actually mean government spending is little changed from 2015, when the deficit was around 2.3%, according to official figures. If the real budget deficit was higher than this in 2015, which some analysts say is the case, spending could actually be down sharply, if tax revenues fall.

On the positive side, China also set its consumer inflation target at 3%. Considering CPI was at 1.8% in January, this gives Beijing some leeway to stimulate demand without breaking its targets. Most consumer spending is now expected to be on services, although automotive is still expected to have a decent year.