Aug. 5 (Bloomberg) -- Chinese metals consumption may cool if government orders for stress tests on banks to gauge the impact of a property price slump of as much as 60 percent indicate the market has further to fall, analysts say.
"If it's true, the news will have a negative impact on the market as it could signal the government's expectations for further property price falls," said Fang Junfeng, an analyst at China International Futures (Shanghai) Co. China is the world's biggest consumer of metals.
Copper and zinc prices, both used in construction, gained by at least 12 percent last month on optimism the global economic recovery will boost metals demand. Previous stress tests assumed home-price drops of as much as 30 percent and the tougher assumption may underscore concern that last year's record $1.4 trillion of new loans fueled a property bubble.
"Steel, cement producers will be mostly hurt if China's property prices tumble because over half of the demand for commodities comes from construction," said Heng Kun, a Shanghai-based analyst at Essence Securities Co.
Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, a person with knowledge of the matter said, declining to be identified because the regulator's requirement hasn't been publicly announced.
Copper tumbled 12 percent in May and June after Chinese regulators curbed loans for third-home purchases, increased down-payment requirements and raised mortgage rates, in a series of announcements from mid-April, in a drive to rein in spiraling property prices.
"It will be more of a psychological impact as it may raise concerns that it could lead to more regulation and tightening measures," said Li Ye, an analyst at Minmetals Starfutures Co. Still, "the way the market has been going these days, bearish news just gets shrugged off."
Banks were also told to stress test loans to industries including steel, cement, construction materials and home appliances that are related to housing, the person said.
"Industries related to property development and raw materials used in construction will all be affected," Wang Xiaoli, an analyst at Citic Futures Co., said from Shenzhen. "It's not that they think prices will drop by 60 percent, however it is a signal that there is still room to cool the property market."
The China Banking Regulatory Commission said in a July 20 statement that banks should "continue to deepen" stress tests on lending to property and related industries, citing a speech by Chairman Liu Mingkang during a meeting attended by regulatory officials and bank heads.
"If they pass the stress test, it's going to set the stage for another huge rally," China International's Fang said.
Copper for three-month delivery fell as much as 1 percent to $7,430 a metric ton on the London Metal Exchange, and traded at $7,441 at 2:57 p.m. in Shanghai. Zinc dropped as much as 1.3 percent to $2,092 a ton.