I recently had the chance to visit Shanghai and Beijing with Frank Holmes, CEO and CIO of U.S. Global Investors (NasdaqCM: GROW), along with other fellow board members and key executives from U.S. Global. The trip really put into perspective the China growth story one always hears about but never really gets to appreciate firsthand.

After my first steps onto the street, I quickly noticed the noise and movements of the city. One only needed to take a quick look to notice the massive development projects that were taking place as the city tries to live up to the persona of a global hub.

China’s domestic growth is on the fast track. The government has poured hundreds of billions into fueling its own economy. For example, more than $300 billion has been spent on connecting Chinese cities with a high speed rail network, which will help bring millions of people closer together. Frank and I had the chance to travel through the 923-mile stretch between Shanghai and Beijing on a high speed rail train that was running at an average 185 miles per hour.

Emerging markets, like China, have “focused on their stimulus, on job creation and infrastructure development, their roads to economic growth have already been paved,” Holmes shared with me. “This will allow them to flex their economic muscles during short-term instability and insulate them from the turmoil.”

China’s economic growth has also been bolstered by domestic consumption and gross capital formation in recent years. Since exports collapsed by 40% right after the financial crisis, China has been weaning off its dependence, and recent data shows that exports have contributed very little to the overall growth, writes Frank Holmes for Forbes.

According to Asia Research and analyst Firm CLSA’s Andy Rothman, data shows that net exports made up 18% of China’s total 14.2% growth in 2007, whereas exports contributed to a minus 0.7% to China’s 9.6% economic expansion during the first half of the year – a negative current account would indicate higher imports compared to exports.

On our trip, we glimpsed at the beginnings of a rising middle-income population. In turn, the income growth has helped fuel the rise in domestic consumption. According to CEBM China Research,  China’s GDP per capita has hit $4,000 – at this level, the middle class will begin to demand goods that improve their quality-of-life. CLSA research shows that inflation-adjusted wages in urban areas jumped 7.8% in 2010 and have already risen 7.6% during the first half of the year. Urban retail sales and household expenditures have vaulted 17.4% and 12% in the second quarter, respectively. CEBM also notes that the retail sector in China is estimated to expand 35% for 2011, with sales expected to jump 18% year-over-year, as the growing middle class consumes more goods. [China May Lead Emerging Markets ETFs]

The ISI group calculated that retail sales rose 17% year-over-year in August, and the firm believes the “work, earn, consume” mindset that China has been adopting will further fuel the demand for luxury goods.  A large tax burden, though, has been placed on the luxury goods market, sometimes upward of 50%, but the wealthy and affluent have taken the tax hike in stride as the higher prices only augmented the goods’ status appeal.

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