China emerged on the world's economic stage, in the 1990s, as a gargantuan manufacturer, sending auto parts, shoes, and plastic dolls to buyers everywhere. Low-cost labor and a newfound openness to foreign investment unleashed enviable levels of economic growth, recently hovering at around 10 percent. No global corporation dares strategize without taking the country into consideration. Yet the impact of China the producer could pale in comparison with that of China the consumer.

Although there is a growing realization that the country is emerging as an important market for consumer goods, many multinationals still underestimate how large it will become, and how quickly. In 2004 about 36 million urban Chinese households had a disposable income of at least 25,000 renminbi (about $3,000) a year—by local standards, a reasonable threshold for entering the consumer class. By 2009 the number could almost triple, to 105 million urban households. While some segments of the populace are quickly becoming experienced shoppers, a massive influx of new consumers is now reaching the cash registers. Every year about 20 million Chinese (a population about the size of Australia's) turn 18 years old. Prosperity is lifting the incomes of tens of millions more.

China's consumers won't become more and more like their Western counterparts, as some might expect. Similarities will surface as shoppers gain experience, but our research suggests that Chinese consumers—particularly the younger generation—will continue to embrace the traditional values of family and community. A hybrid global consumer is likely to emerge: one eager for modern products but with distinctly Chinese tastes and behavior. The impact of these consumers is already being felt beyond the country's borders: for example, the high-end clothier Shanghai Tang, heralded as China's first global luxury brand, is a rising star in fashion. As the country's manufacturers, immersed in the tastes of domestic consumers, continue their evolution from copiers to innovators, Chinese style could become a major global influence in many industries.

In this special edition of The McKinsey Quarterly we examine these developments. For example, three articles drawn from research across cities of all sizes look at the way fickle Chinese attitudes toward big labels make building strong brands difficult and probe two relatively unknown but important groups: shoppers in towns and small cities and teenage consumers. "The value of China's emerging middle class," from the McKinsey Global Institute, follows the likely trajectory of hundreds of millions of urbanites. Even with only modest economic growth, this group could include a staggering 520 million upper-middle-class consumers by 2025.

But as the issue also shows, China's rapid rise as a manufacturer and a consumer hasn't come without costs. Social inequalities have arisen in the wake of economic growth concentrated along the coast, as well as policy changes eliminating the cradle-to-grave safety net. The environment too is worrisome as more cars hit the streets, more factories begin production, and more coal is burned to meet the country's energy needs. If left unchecked, these and other issues could threaten the stability of China and make multinationals wary of overinvesting in it.

In "The road ahead for capitalism in China," one of the country's leading economists, Wu Jinglian, argues that today's policy decisions will determine whether the economy develops under the rule of law or becomes muddled in crony capitalism. "Checking China's vital signs: The social challenge" considers the progress made in addressing these problems and the arduous journey that remains. Exceptional economic growth has also sparked concerns about how the country will satisfy its appetite for oil. "Meeting China's energy needs through liberalization" presents the case for opening up the energy sector to increased investment by foreign and domestic private companies.

Furthermore, rising wages in some regions and an increasingly crowded market mean that global manufacturers can no longer rely on low-cost Chinese labor as a competitive advantage. "Applying lean manufacturing in China" shows how they can overcome the rigid hierarchies and the absence of needed skills in Chinese factories to implement international best practices.

As China's economy matures, the strategies that global companies pursue there must mature as well. We hope to provide them with guidance on the changes at hand and a clear view of some of the challenges ahead.