For the better part of three decades, China’s economic growth strategy has largely revolved around leveraging its large force of cheap labor to become the manufacturing and export powerhouse of the world. That has proven hugely successful, as the country grew its gross domestic product (GDP) in excess of 10 percent for several consecutive years.

However, the cracks in that strategy have begun to show, as GDP growth fell to 9.3 percent in 2011 and an estimated 7.5 percent last year.

Labor costs in China have crept up over the past few years, thanks to the country’s red hot economy. Consequently, many foreign manufacturers initially attracted to the country’s low-cost workers have begun to shift capacity to other, cheaper Southeast Asian countries such as Thailand, Malaysia and even Myanmar. A sharp drop in global demand for Chinese exports has also revealed a fault in China’s export-oriented economy, exposing the country to the economic troubles of the rest of the world.

To combat those challenges, Beijing is looking inward to the huge demand potential of its own domestic consumers.

As wealth in the country has exploded over the past decade, consumer spending has been growing by about 18 percent annually, according to China’s National Bureau of Statistics. That compares to consumer spending growth of only about 2 percent in the US.

It’s interesting to consider what the Chinese have been spending their money on over the past few years. Much of this spending represents the eager pursuit of “the good life” as showcased in the West.

Wine consumption has skyrocketed, reaching nearly 200 million cases per year. Imported wines now account for about a quarter of that consumption, up from nearly nil just a decade ago. Consumption of wine and other luxury goods is expected to grow by about 18 percent annually over the next two years, reaching $27 billion by 2015.

Thanks to that growth, China has become the fastest-growing market for luxury goods made by companies such as Tiffany & Co (NYSE: TIF), Prada (France: PRP) and LVMH (OTC: LVMU). Those luxury manufacturers have seen their sales more than quadruple in China over the past three years alone.

But the taste of Chinese consumers also runs to the more practical.

The country has become the world’s largest smartphone market, with millions of devices from manufacturers such as Apple (NSDQ: AAPL) and Samsung (Korea: 5930) sold every year. Foreign companies aren’t the only ones tapping into that demand; Lenovo Group (Hong Kong: 0992, OTC: LNVGY) has developed its own propriety smartphone technology for exclusive release in China later this year.

A number of companies have also been investing heavily in rolling out advanced data networks across the country, expanding the reach of 3G technology into rural areas and introducing the beginnings of 4G networks in urban markets. That improving data infrastructure has produced surging smartphone sales, which shot up by nearly 140 percent last year alone.

With smartphone penetration expected to reach about 35 percent this year, its forecast that nearly 300 million new phones will be shipped to China in 2013.

While smartphone manufacturers and service providers such as China Mobile (NYSE: CHL) are the obvious play on exploding smartphone sales, a technology that was once in the exclusive purview of the US military and has now become ubiquitous throughout the world offers the greatest upside potential, because it comes preloaded on almost every unit shipped. For more, turn to this issue’s Stock Spotlight.