China is booming. It's now the second largest economy by GDP.

I recently came across some “intel” on China.

It comes via a source I met while I was on my recent investment scouting trip to Southeast Asia.

It is one of the most important firsthand insights on China you’ll read this year.

First, let’s deal with the obvious—China is booming. It’s now the second largest economy by GDP. And it’s set to grow by about 9% this year—roughly three times the pace of the U.S.

But this outward growth hides a number of worrying undercurrents—especially for overseas investors.

My “intel” comes from Druce Vertes, former chief technology officer at a New York hedge fund. Two weeks ago, he returned from a trip to China. He wanted to see whether the China story the media feeds us was true…or not.

Here are some of his conclusions for that trip:

1) Economy – Although China has opened up its economy since the days of Mao, it is not the triumph of market liberalization that some claim. For entrepreneurs, there remain serious bureaucratic hurdles to jump through to get anything done. China remains a highly corrupt, “state-centric” economy. This will continue a big obstacle to growth and innovation as long as the current system remains in place.

2) Stock Markets – Stockholders have no influence over the management of the companies they own stock in. The Communist Party names senior managers of SOEs, and it often makes management decisions. “Fraud and financial shenanigans” are common. “But with inflation outstripping interest rates, and no tax on capital gains, and a population that is known to appreciate a good gamble, stock market and real estate speculation are rampant.”

3) Banking – Chinese banks are “even more screwed up than a lot of Western banks.” Balance sheets are still clogged up with non-performing loans. Following the financial crisis, the Communist Party ordered banks to boost lending. They duly grew their loan books by 30%. “A lot of that lending, for real estate, local government projects, high speed rail, will yield no cash flow soon if ever.” Defaults are sure to follow on some of these loans.

(This is just a quick run through of the concerns my source raised. You can read his full write-up here.)

It’s important to understand that despite all China’s problems—and there are many—it is tough to be bearish on its long-term prospects.

The point is it hard to invest in China. There are still too many smoke and mirrors unless you’re a real China expert…or you have access to someone who is.

Fortunately, you don’t have to invest directly in China to benefit from its long-term growth trajectory.

As my Asia source, Doug Clayton of Leopard Capital, put it to me in an e-mail yesterday:

China is a tilted playing field. Foreigners should invest instead in un-hyped peripheral countries surrounding China, where they are more needed, facilitated and protected. These places surf China’s economic wake without the nasty headwinds.

Doug recommends overseas investors consider adding exposure to Vietnam, Cambodia, Laos, Thailand, Bangladesh, Sri Lanka, Bhutan, Nepal, Kazakhstan, and Mongolia.

There are what I call “pre-emerging” markets. And I’ve written about some of them before: 11 Under the Radar Markets Set to Soar Over the Next Decade and The Best Emerging Markets You’ve Never Considered.

Out of these, only Vietnam and Thailand are easy to invest in. You can buy broad exposure to these two peripheral markets through the Market Vectors Vietnam ETF (NYSE:VNM) and the iShares MSCI Thailand Index Fund (NYSE:THD).

Of course, these markets carry risks too. (Vietnam is also a Communist-run state, for instance. And Thailand has been experiencing a lot of political unrest lately.)

My favorite way to profit from China…and other resource hungry emerging markets…is to buy what I call the “building blocks of growth” – precious resources that these economies can’t live without.

Crude oil, natural gas, uranium and industrial metals will all do well from increased emerging markets demand.

These are a lot simpler to understand that many Chinese-listed stocks. And even if China stumbles along the way to its long-term growth targets, a growing world population and will eventually force demand…and prices up.