For all its spectacular growth in the last decade, China has an economy in rapid transition – from an export-driven economy to one driven by internal needs and demand. Investors who can recognize the change and act on it now may benefit even more than China investors in 2009, when the country’s economy grew by 8.7 percent and its gross domestic product total was $4.9 trillion.

“Our analysis suggests that China’s outperformance is poised to continue and we remain overweight China,” says Richard Ross, global technical strategist with Auerbach & Grayson, a New York brokerage firm that specializes in global stocks. 

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China is the world’s most populous nation and the largest player in the BRIC (Brazil, Russia, India and China) universe. Its’ GDP growth is among the fastest of the world’s major economies. It’s a nation that has built its growth without the kinds of leverage that has been so characteristic of growth of western economies. And its trade surplus of $3 trillion is causing many to see it as the next global superpower, eclipsing even the US.

The global economy now is bifurcated between the emerging markets and the developed markets, with more and more assets — equities and fixed income — being allocated to the emerging markets. Morgan Stanley, for example, expects the inflows into the emerging markets to exceed $1 trillion annually. “Given the extent to which this is likely to lead to foreign exchange reserve accumulation, this trend to a strong pull upwards for emerging market assets,” writes Morgan Stanley’s Rogerio Oliveira. What country is the greatest beneficiary of this asset allocation? China.

Still, there is also a lot of bearish sentiment that has suddenly overtaken the optimism surrounding China. Inflation in China could undo many of the strides that the economy has made, the bears say. They point to the slowing down of the economy and to the housing bubbles that are about to burst.

The recent purchasing managers’ index, a key gauge of manufacturing growth fell to 52 in May, down 0.9 from 52.9 in April. While the drop is an indication that the economy is slowing down, the economy is still in an expansionist mode, analysts point out. The slowdown only becomes worrisome if the index drops below 50. And that may be a long way away.