When the global demand for China's exports dropped to next to nothing during the economic crisis, the Chinese government swiftly passed a stimulus package that topped off at 4 trillion yuan ($586 billion). It was largely designed to boost Chinese citizens' demand for goods—both through projects that would create new jobs (and with them, disposable income) and incentives that would entice them to spend.

Now, at a time when the U.S. is battling double-digit unemployment rates, China is building factories, highways and railroads. It's developing a middle class that is demanding the luxury products a more frugal America has left behind. And it's even found a way to diminish the detrimental effects of the plunge in global demand for its exports.

In the global race out of the recession, China is leading the pack. But what's next? Is China on the fast track to its strongest growth yet-or could it run out of steam before it reaches the finish line? And should Americans invest now?

Most industry analysts agree that the answer is, uh, maybe. Investors are confused as well. Enthralled by the epic growth story, many Americans are jumping in—but they're worried about the risks. China's centralized economy is directed by a government that is also the majority owner of many public companies. As a result, many investors are concerned about their rights as shareholders. In addition, the stock market there is still small—and extremely volatile.

Nevertheless, China's shift away from exports, while gradual, is significant. It puts China in control of its own future and has the potential to pave the path toward its international economic dominance. But as the shift continues, it will also change the way Americans will and should invest in this booming economy.

IS IT A BUBBLE?

American investors have been snapping up mutual fund and ETF shares to gain exposure to China since the recession began. The Matthews China Fund (53.9% of whose assets are in China), for instance, saw $751.4 million in inflows year-to-date through Sept. 30, while the BlackRock Global Emerging Markets Fund (9.5% in China) took in $15.3 million. The benchmark emerging-markets ETF—the iShares MSCI Emerging Markets Index (11.16% in China)—raked in $3.7 billion. All three funds buy a combination of Chinese stocks listed in the U.S. and Hong Kong.

So far, the funds' bets have paid off in abundance. The Matthews China Fund returned 73.64% year to date as of Nov. 9, while the BlackRock Global Emerging Markets Fund was up 70.64% and the iShares MSCI Emerging Markets Index rose 65.89%. But as investors rake in sky-high returns, many worry that rising asset prices and liquidity could stir up the next big bubble.

China's volatile nature is also keeping investors on edge. The Hang Seng Index, the benchmark index on the Hong Kong exchange, has seen its share of double-digit drops over the years. From its 12% plunge the day after the Sept. 11, 2001 terrorist attacks, to the 30% drop it incurred between Oct. 30, 2007 and March 9, 2008, China has long been known for roller-coaster returns that last year in the U.S. sent American investors running for the sidelines. Now, as the top Chinese funds pour money into a consolidated group of companies—most of which have the Chinese government as their majority shareholder—Americans wonder if their investments are safe.

Richard Gao, manager of the Matthews China Fund, doesn't expect to see such high returns for much longer. The market, he says, has priced in most good news. "I won't be surprised to see the market more volatile going forward, or some correction, but on a three- to five-year horizon I'm very encouraged." As of Nov. 9, the Matthews China Fund had $2.3 billion in assets.

If you look at valuations, China is not in bubble territory, says Daniel Tubbs, manager of the BlackRock Global Emerging Markets Fund, which had $238.4 million in assets as of Nov. 9. Chinese securities, on average, are trading at 14 times next year's earnings, a price Tubbs calls "not expensive" compared with the country's historical high of more than 20 times earnings. "We're far from the historical peak," he says.

Investors now wonder whether to invest in China alone or in a diversified emerging-markets fund. Arijit Dutta, a mutual fund analyst at Morningstar, recommends using an Asia Pacific fund or a diversified Asia ex-Japan fund. Gao believes that clients who invest in China specifically need to maintain a long-term perspective. He says: "If you take a long-term look at the historical performance of Chinese equities on a three-, five- or 10-year time horizon it's been providing quite decent returns and it should continue to do so."