World Markets

China's market whipsaw: Should you try to play it?

Most extreme China bubble?

China's frothy stock market, subsequent correction—and its recent rebound—may have some investors scratching their heads and wondering if they should try to play its roller coaster.

The Shanghai Composite has spiked 90 percent in the past year, despite a meltdown that started in mid-June. The market ended higher in the last two days of trading, thanks to regulatory support from Beijing.

However, emerging market expert Ruchir Shamra has two words for investors: Stay away.

"In some ways it is the most extreme bubble I've seen in the last 20 or 30 years because there is no fundamental basis for this massive rally to take place given how weak the Chinese economy is and given the amount of margin debt, which has been accumulated in such a short span of time," the head of emerging markets for Morgan Stanley Investment Management said in a recent interview with CNBC's "Closing Bell." (Tweet This)

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In fact, the amount of margin debt in the Chinese stock market is higher than any market in history, he said. Margin debt is when investors borrow money to buy equities. According to some estimates, China's margin debt recently topped $358 billion.

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The recent equity rout led the Chinese government to take drastic measures, including barring state-owned companies from selling their shares.

On Friday, Premier Li Keqiang said the country will make more targeted changes to its policies to support the economy. The People's Bank of China has already lowered interest rates and reduced the amount of reserves the banks must hold.

China has said it is targeting its gross domestic product growth at around 7 percent for the year. Sharma said that if the economy does, in fact, grow at 5 to 7 percent over the next couple of years, "there will always be some opportunities. It's a large enough market."

However, given the amount of debt that the country has accumulated, it's now questionable whether it can grow at anywhere close to those rates, he added.

"The valuations also matter, that outside a few large cap stocks in China the entire market is trading at extremely high valuations and those valuations need to correct a lot more before they really become a buying opportunity."

Hunting for value

Smartest way to invest in China: Pro

Long-time China investor Mike Holland said there are still buying opportunities despite the overall sky-high valuations, but investors just need to go about it the right way.

"The smartest way to invest … is to find a manager on the ground over there, which is what we've done for the last 20 years," he recently told "Power Lunch."

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Holland, who is chairman of Holland and Co. and is also on the board of the China Fund, said fundamental analysis is key. Names such as Ping An Insurance and the Hong Kong Exchange are top holdings of the China Fund.

"These are companies which actually make a lot of money, have not crazy valuations. You can find companies that are trading at 15, 20 times earnings who are solid companies, who make a lot of money and pay dividends," said Holland.

One thing he wouldn't do is buy an ETF or index fund.

"I stopped using ETFs and index funds or recommending them to people a long time ago because of the crazy valuations going on in the high-priced companies."

He likened the overall Chinese stock market to Wild West casinos and noted that people have been investing in companies trading at 50, 75 and 100 times earnings, all fueled by margin buying.

—CNBC's See Kit Tang, Stefanie Kratter and Reuters contributed to this report.