Consumer Spending Weakens

"As long as home prices in Chinese cities, especially major cities, do not ease, Chinese consumer spending will not see a big rise," said Jeff Walters, a partner and the managing director of BCG Greater China, who added he was not surprised by the growing frugality of consumers in bigger cities.

The survey found the most careful shoppers are now middle-class, affluent consumers in small cities, with respondents willing to spend more decreasing 19 percentage points over last year to 23 percent.

In comparison, there was just a 10 percent fall in the spending plans of ordinary consumers in small cities and for ordinary consumers in larger cities, the drop was 6 percent.

"Until recently, the much-coveted middle-class and affluent consumers in lower-tier cities were relatively immune to the economic crisis, owing to their lower cost of living. Their optimism made them the most attractive consumers segment in the country," said Walters.

"But now, the tide has begun to turn and the decline in larger cities is bottoming out.

"Consumers in smaller cities, however, are finally feeling the pinch of the domestic slowdown," he said.

While consumers in big cities scrimp mainly to buy property and cars, their counterparts in smaller cities save more out of concern for supporting their children and elderly relatives in what is being seen as a less-than-stable social-welfare system, the report showed.

"Small cities have more private entrepreneurs and SMEs, who are more sensitive to economic fluctuation.

"More people working for the public sector in small cities, and China's recent government-led frugality campaign had a larger impact on them," added Yunling Zhou, a principal in BCG's Beijing Office.

"What's more, consumers in smaller cities have a heavier family burden and a more traditional mindset."

However, researchers said that weakened consumer sentiment might be good news for some companies.

While total spending is down, consumers are becoming more sophisticated shoppers making better use of their budgets.

A huge 80 percent said they are buying fewer, but better-quality items. Shoppers are also becoming smarter, researching purchases on the Internet before buying.

Brand names with good reputations, as well as products and services associated with good health, such as babycare, skincare, and nutritional items, are well-positioned to benefit from the changing spending habits.

But producers of goods that are considered to be superfluous, such as luxuries, restaurants and chocolates, must adapt to conditions and make the offerings more appealing, the report suggested.

Researchers said they did not find a great deal of pessimism regarding the country's long-term economic development, however, with only 11 percent of respondents agreeing that "the economy will not improve within the next several years".

BCG said that the current dip in optimism was short-term, and that increased levels of saving should not overshadow an overall bright future in China.