I. Still Proactive Fiscal Policy

　　Due to the instability of global economic recovery and the fact that the foundation of domestic economic growth demand is not yet very solid, a proactive fiscal policy will continue to be implemented in the new year to provide funding and purchasing power support for achieving the economic growth target of over 7%. Specifically, the proactive fiscal policy in the new year will mainly manifest in appropriately expanding the fiscal deficit and increasing the scale of government bonds. It is expected that, including central government bonds issued on behalf of local governments, the national fiscal deficit will be around 1.5 trillion yuan, accounting for about 2% of GDP. At the same time, taxes will be stabilized. The funds from fiscal policy will mainly be directed towards areas such as people's livelihood and environmental protection, which is conducive to increasing demand for steel and smelting raw materials such as coke, ore, and scrap steel.

　　II. Monetary Policy: Neutral Operation but Actually Biased Towards Easing

　　Generally speaking, in the new year, China's monetary policy will neither tighten nor loosen. The decision-making level adheres to a "prudent" neutral operation, but actual money supply may be neutral to slightly loose rather than tight. This is not only because domestic growth stabilization requires relatively loose monetary policy, but also because of the continued extremely loose monetary policies globally, especially in developed countries, including the Federal Reserve's continued massive money printing in various forms to solve fiscal difficulties, which will not truly substantively exit "QE". Even if it exits, it will be a slow process lasting several years, and at least in 2014, monetary easing will not be completely withdrawn. Not long ago, the European Central Bank unexpectedly cut the eurozone benchmark interest rate to a historic low of 0.25%, and also considered negative interest rates as an important option. The Bank of Japan also launched a new large-scale economic stimulus plan of 5.5 trillion yen (328 billion yuan) in early December. Several economies such as the Czech Republic, Peru, Australia, and New Zealand have压低 their respective currency exchange rates through interest rate cuts, selling their currencies, or verbal intervention. Therefore, some views hold that the smoke of a new round of currency war is quietly rising.

　　In this environment, and because RMB interest rates are too high, overseas "hot money" will inevitably continue to flood into the country in large quantities, forcing the central bank to correspondingly release funds outstanding for foreign exchange. Recent data released by the People's Bank of China show that in October 2013, all financial institutions added 441.6 billion yuan in funds outstanding for foreign exchange, a month-on-month increase of 2.5 times, the second highest record of the year. Funds outstanding for foreign exchange are the main channel for China to create base money at this stage, and their increase certainly means an increase in market liquidity. At the same time, China's "deposit reserve ratio" has reached an unprecedented high level and is difficult to further increase. Affected by this, domestic money supply in 2014 will be looser than the previous year, with M2 growth likely exceeding 13%, and RMB credit scale likely approaching 10 trillion yuan. This is not something that can be decided by subjective will.

　　If countries around the world compete to devalue their currencies and "hot money" inflows become too turbulent, it will inevitably increase pressure on RMB interest rate cuts. Although the Federal Reserve will not easily exit "QE", if the US economy strongly recovers in the new year and the Federal Reserve really exits "QE", the demand for safe-haven US dollar assets will increase, triggering a large outflow of funds from the Chinese market, and the central bank will inevitably cut the reserve requirement ratio to ensure funding needs for "stabilizing growth". Therefore, actually relatively loose money supply is conducive to heating up the steel market.

　　III. Housing Market Policy Striving to Increase Housing Supply

　　In recent years, housing prices in major Chinese cities, especially first-tier cities, have continued to rise. Besides rising costs (including government tax costs), an important aspect is the obvious shortage of housing supply, which makes it difficult to meet the rigid demand and improvement demand of ordinary residents. To this end, relevant departments are changing their thinking on housing market regulation, from simply suppressing speculation to simultaneously increasing housing supply and suppressing speculation, with greater efforts to increase housing supply to meet growing rigid demand, especially in first-tier cities, and introducing local government assessment targets. Not long ago, the State Council held a meeting requiring local governments to ensure the realization of residential construction targets, thereby promoting residential construction.

　　In 2013, China's real estate market saw both volume and price rise, especially with hot sales of housing in first-tier cities, smooth capital recovery, abundant financial resources, and a significant increase in land reserves. All of these will inevitably expand real estate investment and drive growth in steel demand.

　　IV. Investment Policy for Adjusting Structure and Strengthening Environmental Protection

　　Adjusting the economic structure and energy conservation and environmental protection will be important regulatory tasks in 2014. To achieve a reasonable adjustment of the national economic structure, increase energy conservation and environmental protection efforts, and strengthen weak sectors, all require increased fixed asset investment. Accelerating reform, canceling administrative approvals in some areas, introducing private capital, and relying on the market to allocate resources will provide new impetus for investment. It is expected that China's construction investment in 2014 will be carried out in many areas such as energy conservation and environmental protection, urban and rural infrastructure, transportation roads, livelihood services, and residential housing. The construction scale in these areas is huge. It is expected that in 2014, total fixed asset investment in the whole society will exceed 55 trillion yuan, with a nominal investment growth rate of about 20%. Such a huge scale of investment and construction will inevitably stimulate huge demand for steel.

　　V. Industrial Policy Suppressing the Release of Outdated Production Capacity

　　Since the beginning of this year, national attention to environmental protection has significantly increased. It is expected that in 2014, increasing energy conservation and environmental protection will become an important goal of macroeconomic regulation. In the new year, strengthening energy conservation and environmental protection, especially strengthening environmental law enforcement, can have two positive impacts on the steel market.

　　First, it forces enterprises across the entire steel industry chain to increase environmental protection investment, leading to a general increase in environmental protection costs. For example, preliminary estimates show that if the necessary environmental protection costs of the entire steel industry chain (mining, coking, steelmaking, rolling, etc.) are ultimately accumulated into finished steel products, each ton of steel will increase environmental protection costs by at least 500 yuan. Even if environmental law enforcement is only increased by 20% in 2014, the national crude steel environmental protection cost will increase by 100 yuan/ton. According to another estimate, after strict environmental law enforcement, the marginal cost of domestic iron ore will rise to over $120/ton, thus providing great support for price trends. In addition to environmental protection costs, other cost factors such as logistics costs, energy costs, and wage costs in the steel industry will also tend to increase in the new year.

　　Second, the release of outdated production capacity is suppressed, which is conducive to improving supply and demand relations. The outdated production capacity mentioned here mainly refers to high-pollution and high-energy-consumption capacity, and it is estimated that this part of capacity will not be too small a proportion of total capacity. If relevant departments can strictly enforce environmental laws in the new year, then the release of some seriously polluting and excessively energy-consuming outdated steel capacity will inevitably be greatly suppressed, which is also conducive to improving supply and demand relations.

　　Due to the influence of the major regulatory policy environment in the above aspects, it is expected that China's steel market will continue to moderately recover in 2014. Total annual crude steel demand (including direct exports, the same below) will reach or exceed 840 million tons, an increase of over 5%, of which direct and indirect exports of crude steel will continue to exceed 100 million tons; national statistical crude steel output will reach 820 million tons, an increase of about 5% over the previous year. If output not included in statistics is considered, actual crude steel output will be even higher, possibly approaching 850 million tons. This will drive iron ore import growth to exceed 8%; overall steel price increase will be around 2%. Continued market price rise will increase the value of enterprise inventories and improve profitability.