Nearly every quarter since China embarked on its journey toward capitalism, fears about its rate of economic expansion have been raised.

Such was the case again earlier this week, when China said its economy grew at its fastest pace in a decade. Much hangs in the balance if the country can't control its growth, as one investment bank indicated after China's announcement that its gross domestic product advanced at an 11.3% annual rate in the last quarter.

"China urgently needs to rebalance the economy, cooling down investment and relying less on exports and more on domestic consumption," Lehman Brothers said.

However, as has been the case in the past, the worries might well be overdone.

"The headlines look quite alarmist, but the reality is that China's a big ship, and it moves very slowly," says Julian Thompson, a portfolio manager at RiverSource Emerging Markets Fund, with about $520 million in assets.

Thompson points out that with China there has been little correlation between GDP growth and investment returns. "If you look at the Chinese economy from the 10-year period ending in 2005, it had the fastest growth rate in the world," he says. But during the same period, the Chinese stock market has delivered a negative 3% annualized return.

Cheap manufacturing was once the key to China's expansion and economic health, but Thompson says the new barometer will be the emerging consumer economy and whether it will be strong enough to bring the country's growth in for a soft landing.

Logic dictates that some sort of slowdown must happen, says Brian Fabbri, chief economist at BNP Paribas. "Anything that grows as rapidly as the Chinese economy has been growing is subject to some serious reversals," he says. "To not expect some significant reversals is foolish and foolhardy.

So when Beijing finally does take measures to hit the brakes, hopefully consumer spending will be there to ease the pain.

"When an economy is a little bit out of balance, when most of the growth takes place on the investment side with limited growth in consumer spending, in the history of Western economies, we have seen that those reversals have been more serious," Fabbri says.

The Consumer Is Key

Turning China's citizens into voracious consumers is a proposition that relies heavily on job stability and better wages.

"It is helpful to compare China to India, another country of 1 billion people, but one where workers are free to form independent trade unions," says Daniel Rosen, a principal at China Strategic Advisory and a fellow at the Institute for International Economics. "Over the past 10 years, manufacturing wages have risen faster in China than they have in India. In fact, Chinese labor is now more expensive than many of its developing Asian neighbors, including India, Indonesia and the Philippines."

Rosen says Chinese wages are going up, meaning there are more potential buyers of goods and services than there have traditionally been in the past. "There's more than one reason to be a foreign direct investor in China," he says. "There's still inexpensive labor vs. what we'll find in Ohio, and there's a growing customer base, too."

For stock investors looking to be ahead of the game, this is where they may want to set their sights, too.

Starbucks ( SBUX), Wal-Mart ( WMT) and Yum! Brands ( YUM) have or are in the process of making China central to their expansion strategies.

Citigroup ( C), meanwhile, is one of the companies showing a major interest in China's nascent banking system. Currently, only a small segment of the population in China has a credit card or uses loans for purchases.

"The idea of domestic consumption picking up is becoming more realistic as more evidence comes out that Chinese consumers are just like consumers anywhere else," says Thompson. "Given access to credit, we have seen that they will consume."

Growth for Stability

The Asian Development Bank wants China to take on more aggressive measures, including increasing the value of the yuan, raising bank deposit and lending rates, creating higher reserve-requirement ratios for banks and reducing control on capital outflows.

Further yuan revaluation is the measure that would please U.S. lawmakers most. China's rigid exchange rate has been blamed for adding to huge foreign-exchange inflows that have undermined Beijing's attempts to suck liquidity out of the economy. China's trade surplus hit a record $14.5 billion in June, and foreign-exchange reserves rose to $941.1 billion.

Beijing has kept frustratingly mum on whether and when it will revalue again, and Chinese central bankers have eschewed the blunt instruments of a dramatic interest rate hikes and large currency revaluations. Rather, the government has targeted specific sectors as they overheat by halting or delaying new projects, thus putting the brakes on production growth.

The U.S. Federal Reserve, in contrast, uses the broad power of rate hikes to battle inflation as a systemic ill.

Even more than cooling its economy, which has been running hot for years, it's essential for Beijing to quiet the civil unrest that has been brewing along with a burgeoning wealth gap. It's the primary policy obsession for an autocratic government that has retained power in large part by creating the perception that things are constantly improving.

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