China Tightens the Screws

12/22/2009 1:58 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

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 this post for more.)

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 the balance sheet by packaging them and selling them to trust companies. (See this recent post for more on that.)

The regulatory campaign has created a correction in bank and real estate stocks. The iShares FTSE/Xinhua China 25 Index ETF (NYSEArca: 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 International (Nasdaq: 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.

In December, though, bank and real estate stocks have kept falling—FXI fell another 4% from November 27 to this morning, December 22, for a total drop of 11% since November 16. But CTRP has now joined in the rout: Its shares have fallen 9% from December 2 to this morning.

CTRP is a stock that I’ve suggested readers watch for as a possible buy on any dip. (For my logic on CTRP and some other China stocks to watch, see this blog post 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 CTRP in my personal portfolio. I am looking to add to that position.

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