China GDP: The real number to watch

There have been plenty of headlines today about China's latest economic report.

And for good reason: what happens in China, the world's second largest economy after the US, matters to the rest of the planet.

So here's the quick news:

The country's gross domestic product slowed to 8.1 percent in the first quarter of this year.

That's the slowest rate in three years.

Even more troubling was how that number looks on a quarter-by-quarter comparison.

By that measure China's economy is growing at a rate that's below the government's target for the year.

All of this is made more urgent by this year's leadership change in Beijing, an uneasy political transition underlined by the stunning fall of former Chinese Communist Party boss Bo Xilai, which this week took yet another surprising twist.

But the economic news out of Beijing today isn't all bad.

In fact, in one very important way things are going exactly as planned.

Here's why:

The whole game in China — and the chief strategy of Beijing's leadership — is to gradually transform the Chinese economy into one that's based less on exports (think Foxconn-like workers making stuff for the world), to a more stable composition where economic growth comes not from the vagaries of the international market, but rather from Chinese people buying things (think the US, the EU and other more developed economic powers).

And that strategy is actually going pretty well for Beijing, at least in today's economic report.

As noted by the Wall Street Journal's Real Time China blog, consumption spending by households and government made up 76 percent of China's economic growth in the first quarter.

That spending percentage is even higher than in the US, and compares with an average of about 40 percent over the last ten years in China.

Over the long term, this is the number to watch, as it's the most reliable indicator that China is — or is not — succeeding it its goal of transforming its economy.

Of course, there are plenty of warning signs in today's report.

Retail sales — particularly of automobiles where China is the world's largest market — grew at a rate of 11.6 percent, or slightly less than a year ago.

And inflation, which is now running at a rate of 3.6 percent, was a bit of a surprise.

But when trying to makes sense of China and its economy, remember that it's important to keep your eye on the long road and, most importantly, on who's spending all those yuan.