Report details China’s efforts to undermine Fed

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The Chinese government waged a decade-long campaign to undermine the U.S. Federal Reserve and cajole its employees into revealing sensitive information about economic policymaking through both recruitment and intimidation, according to a Senate report released Tuesday.

The findings by Republican staff members of the Homeland Security and Governmental Affairs Committee allege that Chinese officials exploited Fed employees’ openness to academic collaboration to establish long-standing relationships with people privy to nonpublic information about economic policy or interest rate changes. In some cases, Chinese officials resorted to threats to exact desired information, at one point repeatedly detaining a Fed employee.

“China’s targeting of Federal Reserve officials appears rarely aimed at fostering legitimate collaboration, business arrangements, or research exchanges,” reads the report led by Sen. Rob Portman (R-Ohio). “Rather, China’s efforts seem aimed at malicious, undisclosed, and illegal transfers of information that seek to undermine the United States.”

Although the report contained relatively little information on what China specifically was seeking or whether the campaign was successful, it suggests Chinese efforts to infiltrate U.S. institutions have expanded to include the Federal Reserve.

For years, China has employed covert methods to collect intellectual property and other sensitive data from a range of U.S. companies and institutions. At the beginning of 2022, the FBI had more than 2,000 open investigations focused on various ways that Beijing is trying to steal information and technology, FBI Director Christopher A. Wray said in a Jan. 31 speech.

This month, he warned that the threat posed by the Chinese government to Western businesses and governments is “getting worse,” highlighting what he called a relentless, multifaceted effort by China to compete unfairly in the global marketplace.

The Fed wields tremendous influence over the world’s largest economy through its power to set monetary policy. Because of the dollar’s preeminence in the global financial system, its decisions can have consequences far beyond U.S. borders. Information on its next steps is often closely guarded, as incremental policy changes can elicit drastic stock market swings.

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Portman wrote that the Fed is “at the core of the U.S. economy and the stability of the U.S. financial system,” and he accused China of leading a sustained effort to gain influence over the central bank. He chided the Fed for failing to combat this threat.

In a letter to Portman, Fed Chair Jerome H. Powell acknowledged that some people might try to exploit the Fed’s vulnerabilities but rejected assertions that a lack of rigor on the Fed’s part gave China an opening.

“Because we understand that some actors aim to exploit any vulnerabilities, our processes, controls, and technology are robust and updated regularly. We respectfully reject any suggestions to the contrary,” Powell wrote.

He added that all Federal Reserve staff with access to sensitive information undergo comprehensive background investigations, which include a review of their foreign travel and personal contacts. He defended the lawmakers’ allegations about specific Fed staff members while casting doubt on the report.

“We would be concerned about any supportable allegation of wrongdoing, whatever the source,” Powell wrote. “In contrast, we are deeply troubled by what we believe to be the report’s unfair, unsubstantiated, and unverified insinuations about particular individual staff members.”

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The report is based on a Federal Reserve counterintelligence analysis and related FBI investigation. Those inquiries found 13 people, representing eight of the 12 Federal Reserve Banks, with connections to known Chinese talent recruitment programs known as the “P-Network.”

The report did not disclose the identities of any of the Fed officials who were targeted, although several of them are described as holding senior-level positions.

What the report did show is China’s reliance on what Portman called “attempts at subterfuge and tradecraft,” as its officials employed an alternating carrot-and-stick approach to persuade officials to part with sensitive information.

One unnamed Fed employee was detained in Shanghai four times during a 2019 trip, during which Chinese officials threatened his family, told him his phone was being monitored and pressed him to sign a nondisclosure agreement, according to the report.

In the first meeting, the worker was accused of crimes against China and ordered to “say good things about China” while in the United States. In a later meeting, officials plied him with liquor and told him he would have to “give economic advice about the Chinese and global economy” in regular meetings on future visits. The incident was reported to the FBI, according to the report.

In other cases, the Chinese government appeared to exploit long-standing academic research collaborations to gain access to sensitive information, the report said.

Several Fed employees were found to have ties to China’s central bank, while others maintained close contacts with university-centered talent-recruitment programs. Another U.S. employee corresponded with Chinese state-owned media.

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It’s unclear whether the campaign yielded useful information, but there are indications that some Fed employees may have attempted to cooperate with Chinese authorities.

One Fed employee, who had access to Federal Reserve Board data, provided statistical modeling code to a Chinese university with ties to China’s central bank. Another repeatedly attempted to transfer “large volumes” of unspecified data to an external website.

One of the Fed employees attempted to cover their tracks by switching to different communications channels and changing email names after being confronted about suspicious activity. An analysis of this person’s browsing history showed searches for articles about economic espionage. This individual’s website password was “xijinping,” a reference to China’s president.

Powell, in his letter to Senate Republicans, highlighted the vital importance of economic research for central banks, noting that its economists frequently collaborate with scholars elsewhere.

“All of that collaboration is undertaken with the aim of deepening and broadening our understanding of critical issues,” Powell wrote.

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