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China’s stock market correction has spread from financials and real estate to the rest of the market.

For almost two months now China’s banking regulators have stuck to their message: China’s big banks may need to raise more capital and put aside more money for reserves. (See my post http://jubakpicks.com/2009/11/24/so-how-many-bad-loans-have-chinas-banks-made-and-when-will-the-bill-come-due/ from November 24.)

In response China’s banks have throttled back a bit on lending—which has hurt real estate developers and speculators—and moved more loans off-balance sheet by packaging them and selling them to trust companies. (See my post http://jubakpicks.com/2009/12/18/chinas-banks-copy-citigroup-in-hiding-bad-loans-off-their-balance-sheets/ from December 18.)

The regulatory campaign has created a correction in bank and real estate stocks. The iShares FTSE/Xinhua China 25 Index ETF (FXI), which has a heavy exposure to China’s banking and real estate big boys, peaked at $46.35 on November 16 and then fell to $43.11 by November 27. That’s a 7% decline.

During that time, though, the rest of the Chinese market moved along just fine. Ctrip.com (CTRP), an Internet travel company that I use as an indicator for the direction of China’s non-financial, non-real estate stocks, saw its shares move up from $72.19 on November 13 to $77.21 on December 2.

But now we’re getting close to a buying opportunity in rest of the China’s stock market.

In December the damage has spread from those two sectors to include the rest of the market. Bank and real estate stocks have kept falling—the FTSE/Xinhua China 25 ETF fell another 4% from November 27 to today, December 22, at 11 a.m. ET for a total drop of 11% since November 16.  But Ctrip.com has now joined in the rout. Ctrip.com shares are down 9% from December 2 to December 22 at 11 a.m. ET.

Ctrip.com is a stock that I’ve suggested readers watch for as a possible buy on the dip. (For my logic on Ctrip.com and some other China stocks to watch see my post http://jubakpicks.com/2009/11/17/an-undervalued-chinese-currency-is-bad-for-the-world-but-could-be-profitable-for-you/ from November 17.) It’s hard to tell how low this dip will go but on recent history the stock has been a buy when it drops to its 50-day moving average. That suggests that $65 or so would be a good entry. The stock is at $68.57 as I write this.

Full disclosure: I own shares of Ctrip.com in my personal portfolio. I am looking to add to that position.