China's consumers are better understood when looked at as two distinct classes: urban consumers and rural consumers. The urban households are much richer than their rural counterparts and consume three times more. The richest 20% of China's urban households is comparable to the economic size of South Korea or Taiwan.

China's rural sector is a sizeable consumer market on its own. The per-capita income of rural households has grown more slowly than that of urban households, especially after China's WTO accession in 2001. Furthermore, ongoing urbanisation is leading to a reduction in the size of the rural sector. Still, at current income growth rates, China's rural sector will reach by 2020 a size equivalent to India as well as income levels and consumer patters similar to those in lower to middle income Asian countries.

China could overtake Japan as the world's second largest consumer market over the next decade. China's private consumption today is only around 16% of US consumption and 56% of Japan's. But China's strong GDP growth outlook bodes well for Chinese consumers, since it goes together with a rise in per-capita income and the attainment of consumption thresholds (for instance, the purchase of a car). Moreover, there is an array of active policies oriented towards increasing disposable income and rebalancing China's growth model towards domestic demand. Greater pension and healthcare coverage in urban and rural areas is already an explicit goal. Further initiatives, such as giving households greater opportunities to grow their savings via more diversified financial products, would be welcome. All these efforts are conducive to enhancing the share of private consumption in China's economy. This would not only serve China well in its rebalancing quest but also provide the world with an additional, more sustainable engine of growth.

Eoin Treacy's view Consumer related sectors, while making up a small percentage of the market cap of the Chinese stock market, have been outperforming in no uncertain terms over the last year. Their relative strength clearly identifies the growth of the domestic consumer as the most likely engine of stock market growth over the coming years. There is also a high degree of commonality across the world's major population centres with consumer related sectors also outperforming in India, Indonesia and Brazil.

A subscriber sent through the October 2009 annual report for the US-listed China Fund Inc which has been among the better performing China related funds. A quick look at the fund's holdings indicates it is heavily overweight consumer related shares and has benefitted accordingly. The fund is currently trading at a discount to NAV of 7.34% and has been consolidating in the region of the 2008 high for much of the year. A sustained move below $28 would be required to question potential for a successful upward break.