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Hormats: Markets "Way Overreacted" to China's Selloff

As Tuesday's market meltdown shows, China has to walk a fine line when it tries to reign in its surging economy.

A suggestion by China's government that it might curb excessive speculation in stocks triggered an 8.8% plunge in the Shanghai Composite Index and set the stage for a global market selloff.

The markets "way overreacted," Robert Hormats, vice chairman of Goldman Sachs International, told CNBC's Sue Herrera on "Power Lunch."

"The Chinese really only suggested that they were going to look into the practice of people in effect borrowing from banks allegedly for mortgages and putting some of that money in the stock exchange," Hormats said. "The Chinese still remain concerned about this exuberance in their markets."

Hormats said China will use a hybrid approach of interest rate tightening and administrative moves to temper speculation in its markets, but still maintain at least a 10% economic growth rate.

"They will probably raise the deposit rate somewhat, they're tightening up on bank reserve requirements, they have done a number a lot of administrative things to make it more difficult to speculate in commercial real estate," Hormats explained.

Despite the increased perception of risk in the Asian markets, Hormats said he's confident China will be able to strike a balance.