'Benford's Law' Questions Integrity of Chinese Economic Data

The quality and reliability of economic data released by China is being questioned by a research that  based its findings on “Benford’s Law,” a mathematical tool devised by an American physicist in the 1930s.

The rule, created by former General Electric Co. (GE) engineer Frank Benford, can be used to detect spurious data based on certain patterns, says the study by the Australia & New Zealand Banking Group Ltd. (ANZ).

According to Bloomberg, ANZ economists studied China’s annual nominal gross domestic product data from 1952 to 2011 to measure how frequently numbers from one to nine appeared as the first digit. While the 24 occurrences of “one” is higher than the 18 suggested by the rule, the economists said the statistics largely abide by what Benford’s Law allows. The same is true of industrial production data.

Suspicions emerged when the data was probed more deeply and reported in percentage terms, the ANZ report said, adding that the guilty party was often the second digit. An examination of the quarterly GDP growth rate from December 1991 to September 2012 shows zero occurred as the second digit 21 times, much higher than what Benford would calculate and suggesting a rounding-up to achieve a bigger leading digit. One through four also appeared more regularly than the law reckons, while seven through nine featured less.

Inflation reported on a percentage basis also failed to fit the law.

“Our statistical analysis seems to have confirmed the long-rooted suspicion on quality and reliability of Chinese data,” research authors said.

The law has already been adapted to show Greece should have been suspected of manipulating its data before the European financial crisis, says Bloomberg.

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