Businesses need to be more selective and smarter about investing in China, according to one expert. The Demand Institute recently published a report examining consumer consumption trends in China, and found an uneven picture.

'We still see consumption growth growing at a pretty steady clip, over 5% per year over the next 10 years," said Louise Keely, president of The Demand Institute.

"But companies will need to make better regional investments than they have in the past."

The report makes recommendations on which urban areas provide better growth opportunities. For example, The Demand Institute identifies six "super cities," including Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Tianjin.

While those cities have high levels of wealth and well-diversified economies, competition is fierce for multi-national companies doing business due to the presence of foreign brands. The report also finds that since consumption is already high in those cities, further growth is limited.

Keely said there are selective, smaller cities that can provide opportunities for businesses.

The report also examined what it identified as "Connected Spenders," a group of people who will drive nearly 80% of all spending in China. A major factor that defines this group is simply having Internet access, since 50% of Chinese residents do not.

The group is younger, more affluent and better educated than its peers.

The Demand Institute finds that "Connected Spenders" account for just 27% of the total population, but that group is expected to grow sharply over the next decade.

The Demand Institute also looked at uncertainties surrounding China's shift to a consumption economy and cited the growth rate of Internet penetration, how quickly the household financial-services sector develops, and the general policy environment.

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