And if domestic spending is going up in China, it's not just on basic necessities. The market for luxury goods is enjoying strong sales, with China on track to become the world's largest market for high-end items over the next five to seven years.

The report says luxury brands performed surprisingly well in China in the last year. For high-end companies, the world's fastest-growing economy offered one bright spot of hope amidst a global economic downturn.

Vincent Liu from Boston Consulting Group, said, "China remains the bright spark for many of the luxury companies. Even in 2009, consumers remained quite optimistic relative to many of the developed countries' consumers, and many companies, many luxury companies, actually announced a very positive result."

Compared with much of the developed world, China is a relative new comer on the luxury market. But with parts of the population rapidly getting richer, they're making up for lost time.

Vincent Liu said, "Right now, Chinese consumers are relatively younger than most of the clients luxury companies have in other places - most of them are in the 25 to 35 age span. And second is the mobility, meaning many people have increasing income so, you know, yesterday they couldn't afford the luxury products, but one, two, three years down the road, they will have a means to afford and the interest and demand for that product."

The report says while competition is increasingly intense in cities like Shanghai, which has a comparable number of luxury sales-points per capita to New York, the new battle for customers will be fought in smaller, developing inland cities.

Currently over 50 percent of luxury purchases by Chinese consumers are made abroad or in the special administrative regions of Hong Kong and Macao, where taxes on such products are lower than that on the mainland.