The economic realities facing Chinese consumers also dictate which product categories have been most successful, with many executives commenting that the market for accessories and jewelry has grown more strongly than apparel.

Within apparel, several executives observed that brands need to carefully position themselves, citing examples where companies have been successful in the sales of premium casual wear, but struggled to retain the connection to their origins in more high-end couture and ready-to-ware.

China is not a single, homogenous market for luxury goods and is showing increasing signs of segmentation and differentiation, with consumers motivated by more diverse factors and seeking satisfaction in different ways.

Two important needs that are guiding the evolution of the luxury sector are the need for individuality and the need for a rich and indulgent experience.

Status-seeking, known as the "bling factor" in the report, remained key to the growth of luxury consumption. However, Chinese consumers are also developing greater appreciation of brand values and heritage, with connoisseurship, trend-setting, and indulgence also emerging as luxury consumption drivers.

"As Chinese consumers have become more sophisticated, luxury companies also need to look beyond conventional advertising to build brand awareness," said Debnam.

"Alternative marketing strategies, including exhibitions, events, and sponsorship can be more effective in educating the market and reinforcing certain values, such as status, heritage and exclusivity."

The fact that Chinese consumers are able to travel easily overseas due to reduced restrictions and the renminbi appreciation also contributed to the growing sophistication of the luxury market.

In 2006, mainland tourists made 34.5 million outbound journeys, compared with just 12.1 million in 2001.

In the survey, respondents earning more than 8,000 yuan per month traveled overseas on average 2.3 times per year.

"In terms of their consumption patterns, China's consumers are very willing to buy luxury products overseas. This is partly because the high levels of duty and value added tax within China mean that products overseas are often significantly cheaper, but also Chinese consumers want the experience of visiting boutiques or flagship stores," said Debnam, citing over half of the survey's respondents also buy luxury goods as gifts for others when traveling.

While Chinese consumers show a strong desire for luxury products, they remain cautious over credit. In most product categories, fewer than 10 percent said they were willing to buy luxury items on credit. Some 29 percent of respondents still do not own a credit or debit card, while only 10 percent owned three or more cards.

As China's luxury market continues to develop, luxury companies are also changing their business models. One emerging trend is a willingness to invest directly in China's luxury and retail sectors.