Internet supports

Ira Kalish, director of global economics at Deloitte Research, says the Chinese are becoming more sophisticated mainly because of the Internet, with growing awareness of global brands and trends.

People are increasingly giving feedback about specific products, so that others can make more informed buying decisions, he says.

"For foreign and domestic sellers, it is critical to provide information about product attributes, to maintain a high quality of products and to price competitively," Kalish says.

E-commerce has also allowed many foreign luxury or designer brands to enter China's market without a physical presence, says Jessie Qian, partner in charge of KPMG China's consumer markets.

"Shopbob.com, for example, has very good user-experience," she says. "They have a Chinese website and offer free delivery. Such platforms offer new market entrants an opportunity to test the water and get data about the Chinese."

However, Qian points out that foreign brands lack knowledge of the local market, compared with domestic companies, so extensive market research is necessary.

"Some of our clients have research and development centers in China to learn Chinese tastes and preferences," she says.

But China's urban consumer market is prevented from reaching its full potential because of income inequality and the lack of social security for migrant workers, says Wu Jiangang, a research fellow at China Europe International Business School's Lujiazui International Finance Research Center.

"Without adequate social security provision and necessary social welfare, those with low wages would worry about basic expenditure and have to save up more and spend less," Wu says.

"China is only just over 50 percent urbanized, but it has the potential to become 60 to 70 percent urbanized in the next decade. This trend's contribution to building China's sustainable economic growth is immense."

Therefore, Wu says, the government should act on people's concerns about spending on housing, education, pensions and healthcare by improving the country's social security system.

He says this can be achieved by setting up a social welfare system and building more social housing, allowing migrant workers to live, work and receive social and medical care in cities.

"But stimulating consumption is really hard to achieve only by fiscal stimulus," Wu adds. "What the Chinese government should do now is to encourage the development of Chinese small and micro-sized enterprises, including small-scale financial enterprises."

This could be done by policies such as reducing market entry barriers, helping State-owned enterprises step back from competitive industries and reducing tax levels, so they can provide more employment opportunities to accommodate an increasing migrant worker population and continuously support urbanization.