To many western investors, China's rapid emergence as an economic superpower appears to pose a threat to the established world order. From the Chinese perspective, however, China is merely reclaiming its rightful supremacy. After all, for most of its long history, China has been not only the world's most populous nation but also its largest economy.

Certainly, the pace of Chinese growth over the past two decades has been astonishing. From a standing start at the end of the 1970s, the economy has been transformed, growing by around 10% a year since 1990. This year, for the first time in modern history, China will contribute more to global economic growth than the US, according to the International Monetary Fund (IMF).

Growth is likely to remain strong in the coming years. Like Japan in the 1960s, China's average growth rate could continue at current levels for several more years before easing to a still-strong 5% or so for decades. In the short term, it is unlikely to escape entirely unscathed from the current global slowdown. But, even if that does affect Chinese trade, the economy should be driven on by investment. Every year until 2010, the Chinese government plans to spend $300 billion on infrastructure alone, upgrading water and electricity systems and, most of all, transport.

But does the bright economic outlook make China a sound place to invest? Not necessarily. During 2007, the value of the Chinese stock market soared into bubble territory. If a global downturn leads to a slowing of Chinese companies' rapid earnings growth, that bubble might burst.

It is also important to note that Chinese equities have declined significantly in recent months from last year's peak. In November, PetroChina became the world's largest company when it floated on the Shanghai stock exchange. Since then, it has lost 40% of its theoretical market value – some $400 billion.

"In November, PetroChina became the world's largest company when it floated on the Shanghai stock exchange. Since then, it has lost 40% of its theoretical market value."

Another source of concern is evidence that the Chinese economy may be overheating. Growth in the fourth quarter of 2007 was extremely strong, at 11.2%. That was reflected in December's inflation figure of 6.5%. The government is likely to step up its wide-ranging measures to cool growth and thus contain inflation.

Of course, for longer-term investors, any near-term weakness could offer opportunities to buy stocks at bargain prices. Yet the market contains other pitfalls for unwary investors. Despite the superficial similarities to other international business centres, China remains profoundly different from Hong Kong or Singapore, let alone New York or London. One man who knows about doing business in China is Andrew Haigh, recently returned from a two-year stint setting up the Beijing and Shanghai offices of BoC RBS Private Banking, a joint operation between Bank of China and RBS, the parent group of Coutts. ‘It's an insider's market,' he says. ‘If you haven't got people on the ground, it's hard to invest.'

The key to the Chinese business culture is guanxi, the complex web of personal and corporate connections and past favours which drive deal-making in China. It also applies to how the Chinese invest. Apart from bank deposits, investment markets are still new to China, so the focus is on individual stocks, often high-risk tips from personal connections. A well-balanced portfolio comes as a new concept to many of the young, newly made millionaires – mainly entrepreneurs from the property, manufacturing and retail sectors – who make up the bulk of the RBS Coutts clientele.

Another potential pitfall for overseas investors is that Chinese accounting practices are yet to catch up with international standards. Many large businesses are still wholly or partly state-owned but, even for fully private companies, earnings statements can be misleading, causing distortions in market pricing.

Then there are the political risks. Behind the vibrant entrepreneurialism China's new cities, the Communist Party retains a monopoly of power, exerting control over politics, justice and the economy, and investors can easily be blind-sided by unforeseen regulations. For example, in December, when the government became concerned that the Chinese film industry was being swamped by imports, it simply imposed a moratorium on the release of foreign films.

"The key to the Chinese business culture is guanxi, the complex web of personal and corporate connections and past favours which drive deal-making in China."

But perhaps more serious for the long-term health of the economy is the threat posed by the growing divide between the new middle class and the urban and rural poor. The recent rise in food prices revealed the extent of that divide. Last November, when Carrefour supermarket slashed the price on large vats of cooking oil, three people were killed in the stampede. Clearly, the government has compelling reasons – both economic and political – for clamping down on inflation.

If Chinese stocks look a risky investment at present, there are less risky ways to buy into the Chinese growth story. One is to invest in foreign companies which are benefiting from China's expansion, especially companies involved in infrastructure projects.

Meanwhile, China is starting to provide more direct support for foreign markets. Recently, the Chinese authorities extended their qualified domestic institutional investor (QDII) programme, which allows Chinese financial institutions to buy foreign investments for sale to domestic investors. The programme was initially restricted to Hong Kong but has been extended to the UK and Singapore, with plans to include the US, Japan and Germany. That could act as a pressure-valve for the Chinese market, allowing valuations to return to more normal levels, while boosting markets in QDII countries. The Chinese renaissance may be creating imbalances in the world's economic and political systems, but it also stands to benefit us all.

By Giles Peel, head of investment communications, Coutts