Business, Finance & Economics

China economy: What's the big deal about 8 percent GDP?


Decorative red lanterns are hung on trees at a temple to celebrate the Lunar New Year of the Dragon January 22, 2012 in Beijing, China.


Feng Li

The financial world was buzzing Friday about the latest big economic report out of China.

Here's the news:

China's gross domestic product grew at a rate of 7.6 percent in the second quarter, its slowest pace in three years and just slightly above the government's official target for the year.

"At this moment, my focus is not how deep the fall was for the economy in the second quarter, but how long it's going to stay in a hole," Dong Tao, China economist at Credit Suisse in Hong Kong told Reuters.

"My view is that the Chinese economy will be in an L-shape (trajectory) for a while," Dong added.

This is the sixth straight quarter that China's economy has slowed, and the GDP figure is well-below 8 percent — or the number that's ritualistically repeated by China-watchers as being necessary to keep employment up, and social protests down.

Or is it? And what's the big deal about 8 percent GDP?

Back in 2009, Foreign Policy's Drew Thompson made some very smart and interesting points about the origin of that Chinese economic "law" about 8 percent annual growth.

Those points remain salient today.

Like many things in China, Thompson argues, when looking at the economy it's helpful to examine the country's history:

"In all questions of faith, look first to ones creator. In this case, that means Deng Xiaoping. At the 12th Party Congress in September 1982, Deng determined that the national economic goal would be to quadruple the annual industrial and agricultural output of the entire country by the end of the century. Prior to the big meeting, Deng asked then General Secretary Hu Yaobang how the country could quadruple its economy from 710 billion yuan in 1980 to 2,800 billion yuan in 2000, and Hu responded that 8 percent annual growth would do the trick. That's it. Theres no complicated secret formula, no hallowed equation precisely linking growth to employment, no connection to the revered words of Confucius, Mencius, or Lao-tzu. Back in 1982, it was determined that it would take 8 percent annual growth to quadruple the economy by 2000."

But because Deng and his stunningly successful economic reforms have assumed mythic proportions — and the best way to advance in China's elite circles is to not rock the boat — subsequent economic forecasts from Beijing have remained at or near that original 8 percent target.

But to reach those goals, China's economic policy gurus tend to "fudge the numbers," as Thompson said.

That, in turn, makes it difficult for everyone to know what's really going on in the world's second-largest economy.

This phenomenon is kind of a big deal because China — and the other so-called BRICs (Russia, India and Brazil) — can provide lift to the global economy when heavyweights like the United States, Europe and Japan are down.

So, as you ponder the direction of China's economy and what that might mean for the rest of us around the world, remember that the numbers that pour out of Beijing and affect global stock and bond prices are merely guides — not absolute truths.

In economics, as in life, there are no guarantees.