According to a recent report Chinese economic growth is being driven by domestic demand rather than exports. From Breitbart:

The report by economist Albert Keidel of the Carnegie Endowment for International Peace said China’s rapid growth is driven by domestic demand more than exports, and will sustain high single-digit growth rates well into the 21st century.

“China’s economic performance clearly is no flash in the pan,” Keidel writes.

“Its growth this decade has averaged more than 10 percent a year and is still going strong in the first half of 2008. Because its success in recent decades has not been export-led but driven by domestic demand, its rapid growth can continue well into the 21st century, unfettered by world market limitation.”

China is still flying in the face the global economic slowdown. Retail sales there soared 21.6% year on year in May, despite a devastating earthquake and stock market slump. Exports for the same month surged 28.1%, even as demand in major western markets faltered.

“The export statistics are serving as evidence of an economic theory known as ‘decoupling,’”, writes Jason Simpkins in Money Morning, “in which emerging markets in Asia and Europe have developed enough market place muscle to no longer be dependent on the U.S. economy for growth”. He continues:

And ‘decoupled’ markets can survive – and even thrive – even if the United States were to spiral down into a recession.

The report ’suggests that those saying that exports are collapsing are wrong,’ Stephen Green, head of China research at Standard Chartered Bank PLC in Shanghai, said in a report.

Trade did grow with the more mature economies of the West. But China got its biggest boost from such emerging markets as India. Two-way trade with India increased by 70% in the first five months of 2008, the fastest rate of growth among China’s Top 10 trading partners.

China is also forging stronger ties with Latin America. In 2004, Chinese President Hu Jintao predicted that Sino-Latin American trade would reach $100 billion by 2010.

In reality, it reached $102.6 billion in 2007, surging 42% from the year before.

The fact that Chinese exports have more than weathered the global financial storm is a huge blow for critics who had earlier predicted this credit-related mess would cause China to stumble.

China’s economy grew by 10.6% in the first quarter of 2008, despite complications stemming from the U.S. credit crunch, the Chinese New Year and the worst ice storm the country had seen in decades.

‘We have a lot of evidence to support the decoupling view,’ Timothy Bond, Merrill Lynch & Co. Inc.’s (MER) chief Asia economist, said in a research note.

Indeed, the recent surge in exports is proof that China will continue to advance – with all but a complete collapse of the U.S. economy. The growth in sales overseas sales, regardless of what happens in the United States, but they also proved that Chinese trade isn’t dependent on the weakness of the yuan.

For years, the United States and other Western powers have claimed that China has kept its currency, the yuan, artificially low to boost exports. But the yuan gained more than 10% on the dollar in the year through May, and still exports surged.

In the past year in fact, even with the freefalling dollar, China’s trade surplus with the United States has grown from $12.6 billion to$14.3 billion, a gain of 13%. And the fact that exports are accelerating along with the value of the yuan will give China’s central bank some latitude in dealing with inflation.

‘Robust export growth could dispel domestic concerns that a stronger yuan is hurting exports too much,’ Gene Ma, head economist at China Economic Monitor, told BBC News.

The yuan has appreciated 5% against the dollar so far this year, making Chinese goods more expensive in foreign markets. At its current rate, the yuan will almost certainly improve on the mere 7% gain it posted against the dollar last year. And that will help China control inflation and shift from what its central bank called ‘heated’ growth to a more-sustainable economic expansion.

In fact, the effects of a stronger yuan already can be seen. Consumer inflation slowed to 7.7% in May from 8.5% the month prior, two government officials said Tuesday, citing statistics bureau data.

‘Inflation has peaked, at least temporarily,’ Ben Simpfendorfer, a currency strategist at Royal Bank of Scotland in Hong Kong, told Bloomberg. ‘Pork prices have stabilized to some extent. Vegetable prices certainly have.’

Food costs account for 34% of China’s consumer price index, and growth in agricultural prices slowed to 19.3% in May from 24.2% a month earlier, according to the Ministry of Agriculture.

Furthermore, the recent surge in oil prices probably won’t affect China’s consumer prices because of generous government subsidies. The government can afford to subsidize the price of fuel and is likely to continue to do so, Mark Williams, an economist at Capital Economics Ltd., said in a recent report.

‘Even if international oil prices remained at their current levels, the total net subsidy bill for the year would probably amount to less than half of one percent of GDP,’ Williams wrote in a June 5 report. ‘The costs of keeping prices down are still manageable given the strength of China’s state sector. Officials are wary of anything that could raise inflation expectations.’

And even though as producer prices climbed an astonishing 8.2% in May, inflation could still recede in the second half of the year – in part because figures will be compared with prices from last year when food prices soared uncontrollably.

‘The worst is behind us now,’ Paul Tang, an economist with the Bank of East Asia Ltd. (OTC ADR: BKEAY) in Hong Kong, told Bloomberg. ‘The question is more about at what pace the improvement is going to be realized in coming months.’

The best way to invest in China is ‘Chimerica stocks’ says Tom Dyson…

Chimerica stocks are Chinese companies. They do business in China, with Chinese management, Chinese employees, and Chinese currency. They make products for Chinese consumers.

Take China 3C for example. It’s the Chinese equivalent of Best Buy. China 3C sells consumer electronics from more than 600 stores in Eastern China. Or take Origin Agritech. It’s China’s equivalent of Monsanto. It produces genetically altered crop seeds like corn, cotton, canola, and rice. Both of these companies trade on stock exchanges in New York. China 3C’s stock symbol is CHCG. Origin’s stock symbol is SEED.

Chimerica stocks list in the U.S. because they can’t list in China or Hong Kong. “Going public” in China takes about three years. But in America, it only takes about six months. According to Barron’s, “Even now, for every company that goes public [in China] there are probably a hundred in the queue, and a lot of companies want money sooner rather than later.”

A shell company is a stock without a business. The business has no assets or operations, but it still has a name and a stock symbol. To list in America, Chinese companies find an American shell company and back themselves in. Lawyers call this a “reverse merger.”

Take United National Film Corporation. It stopped doing business in 2001 and became an empty shell. In 2007, United National Film Corporation “merged” with a company that makes turbines for Chinese power plants. Now this company’s name is Wuhan General Group and it trades under the symbol WUHN.

Chimerica stocks are the best way to invest directly in China. According to Barron’s, they sell for an average 10 times earnings. The price-to-earnings ratio of the Shanghai Composite – China’s main stock exchange – is 27. Chimerica stocks are cheap because Chinese investors cannot open brokerage accounts in the United States to buy these stocks. American investors don’t know about them. Analysts don’t cover them.

Another bonus: Because Chimerica stocks list on American stock exchanges, they must report their results in English, follow standard American accounting regulations, and comply with SEC rules.

There are about 100 Chimerica stocks. They range in market cap from a few million to a few billion. There’s no official record of Chimerica stocks, but I put together this list of the ones I know about.

I’m not ready to invest in China right now. The Chinese stock market is down 44% from its highs in October 2007 and is still in a downtrend. When the market turns around – which should happen later this year – I’ll pick my China investments from this list…

If you’d like to hear more about Chimerica – and other great ways to invest worldwide – consider coming on board to my International Strategist newsletter. One of my favorite ideas right now is “Commonwealth Shares.” Click here to learn more about them.