China’s booming e-commerce market, which is already transforming retailing on the mainland, could play a significant role in the country’s transition to a consumer-driven economy, according to a new report from the McKinsey Global Institute.

Therapid growth of online shopping, particularly in China’s smaller, poorer cities where physical stores aren’t abundant, is spurring millions of increasingly affluent consumers to buy products online they cannot find locally, according to the McKinsey report.

This isstimulatingdomestic consumption and promises to help the Chinese government’s drive to steer away from the export-and-investment-led economic growth policies of the recent past in favor of a more balanced model in which consumer spending makes a greater contribution to the country’s Gross Domestic Product (GDP).

“Seemingly overnight, China has become one of the world’s most wired retail markets,” McKinsey researchers wrote. “Millions of newly minted consumers can now log on and purchase a vast range of products they could only dream of acquiring just a few years ago.

“This is particularly the case outside of China’s largest cities, where brick-and-mortar retail remains underdeveloped. E-tailing—which encompasses online sales to consumers by merchants of all sizes—is beginning to fill the gap.”

As consumers gain better access to a wider range of products, they are spending more. “Unlocking demand in currently underserved regions accelerates China’s policy goal of increasing private consumption,” according to McKinsey analysts.

China boasts not only the world’s second-largest e-tailingmarket (behind the U.S.) but also the world’s fastest-growing.

Last year, online shopping in China more than doubled to an estimated $190 billion-$210 billion in revenue. “It is exceedingly rare for a market measured in the hundreds of billions of dollars to achieve a year-over-year sales increase of some 60 percent,” McKinsey analysts wrote, calling the growth “astonishing.” China will likely surpass the U.S. in 2013-14 to become the world’s largest e-tailing market, according to the report.

Although online shopping last year accounted for less than 10 percent of China’s total private consumption, McKinsey’s analysis of spending patterns in 266 Chinese cities revealed e-tailing is having “aclear incremental effect” on consumer purchases.

“Our analysis seems to suggest that roughly 60 percent of online consumption is simply replacing offline retail,” researchers wrote. “But the remainder of around 40 percent is incremental consumption that would not have happened without e-tailing.”

Simply put, the ready availability of products on the Internet isencouraging consumers to spend more than they would otherwise. This effect is strongest in China’s smaller cities, where online sales account for up to half of all new consumption. In the smallest “Tier 4” cities, the average e-shopper spends 27 percent of disposable income online, according to the report.

McKinsey estimated e-tailing added roughly 2 percent of incremental value to China’s total private consumption in 2011; by 2020, it could generate an additional 4-7 percent in private consumption.

This means that by 2020, China’s Internet shoppers could contribute an additional $260 billiontothe country’s total retail spending.Retail sales in Chinatotaled RMB 20.7 trillion ($3.3 trillion) last year, according to government data.

What’s more, e-tailing is “beginning to generate broad ripple effects” that are reshaping the Chinese economy.

These effects include “unleashing a surge of innovation and entrepreneurship,” lowering overall retail prices, and forcing modernization in the broader retail sector, which will improve efficiencies for the overall economy, researchers wrote. The industry is also driving significant development in sectors such as logistics, IT services, and digital marketing.

The McKinsey report warned that e-tailing might not reach its full potential without greater investment in logistics, 3G and broadband networks, and data analysis. The industry will also have to make great strides in labor productivity, analysts wrote.

But with continued progress, the rapid development of e-shopping could enable China, where retailing is still largely fragmented and regional, to “leapfrog” more developed Western markets.

“China could forgo the national expansion of physical stores commonly seen in Western nations and move directly to a more digital retail environment,” researchers wrote. “Such a shift would not only help to boost efficiency in the overall retail sector, but it could have broad implications for China’s urban development.”

Online retailing”is fast becoming an area in which China could lead the world in innovation rather than relying on its historical labor cost advantage. China may have largely sat out the 19th-century Industrial Revolution, but today it is poised to lead the 21st-century Internet revolution.”