Is China Too Volatile for Investors?


China's stock market plunged to its biggest drop in more than a decade Tuesday, with the Shanghai Composite Index falling nearly 9%.

The precipitous decline came immediately after Chinese stocks closed at a record a day earlier, which begs the question: Is China too volatile for investors?

Allen Sinai, chief global economist at Decision Economics, said on "Morning Call" that investors should not panic and sell because of the plunge.

"This is a market event, markets get ahead of themselves so we need a correction at some point," he said. "All the stock markets around the world have been frothy and ahead of themselves. Investors should not panic because the fundamentals are strong in the longer run."

The economist noted, however, that China's stock market remains vulnerable to further declines of 5% to 7% and state officials will need to "get tougher" on the rampant speculation currently taking place.

Ashraf Laidi, chief currency analyst at CMC Markets U.S., said on "Morning Call" that the sell-off in China could trigger declines in the rest of the world.

Laidi said it "serves as a catalyst to the unwinding of the carry trade" which could lead to a decrease in global liquidity. The analyst recalled the Asian debt crisis in 1997 which began with the collapse of the Thai baht and quickly spread to other emerging markets and caused a worldwide financial crisis.