Fed Not Prepared to Halt Chinese Information Gathering: Report

The Federal Reserve lacks systems adequate to counter a “malign” effort by China to gather inside information on the U.S. monetary policy and economy, according to a report prepared by Republicans on the staff of the Senate Homeland Security Committee.

Fed Chair Jerome Powell promptly rejected the recently-released report in a letter he sent to the ranking Republican on the committee, outgoing Senator Rob Portman.

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

The Chinese foreign ministry spokesman also branded the report as a “political lie with no basis in fact.”

The basis of the report relied heavily on information the U.S. central bank itself provided. The information dates back to a 2015 internal probe of a group of 13 people at eight regional Fed banks whose patterns of “foreign travel, emails, details in curricula vitae, and academic backgrounds” have become known as the “P-Network” — raised concerns.

The Fed’s 12 quasi-independent regional banks and Washington-based Board of Governors employ thousands of economists from other countries, including China. The committee report agreed that the collaborative approach enhances the Fed’s ability to make policy and understand the economy.

The document cited incidents, not intellectual collaboration, and pointed to a “sustained effort by China, over more than a decade, to gain influence over the Federal Reserve.” The report also detailed case studies of five people, including four who continue to work as employees of the Federal Reserve. The Fed reported it found no instances where a violation of policies had occurred in sharing information.

Powell continued his defense of the Fed, writing he had “strong concerns about assertions and implications in the report” and detailed the technology used by the Fed to prevent security breaches and the background checks Fed staff undergo.

“We would be concerned about any supportable allegation of wrongdoing, whatever the source,” wrote Powell. “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.”

According to Chinese foreign military spokesperson Zhao Lijian, the report was “maliciously concocted by a handful of Republican lawmakers and is a political lie with no basis in fact.” He continued, “I am afraid that some U.S. politicians are suffering from China-phobia and persecution paranoia, and they seem to be quite ill.”

Committee says activities raise red flags

According to the report, the activities discussed raised flags inside the Fed and go back several years. Fed officials frequently address cyber-security risks but seldom handle being the target of human intelligence gathering. For example, some central bank staffers had kept in touch with a former regional Fed employee, identified in the document as “Z,” who had ties to a Chinese “talent recruitment program” utilized by the Communist Party of China to develop sources inside technical institutions in the United States, according to the report.

Recruitment programs, including the “Thousand Talents Program,” were previously highlighted in a Senate report as a critical way China uses academic lecture positions, research grants, and other perks to export and understand U.S. intellectual policy.

In that instance, the situation caused Fed officials to worry “that there were organized efforts by foreign governments … to solicit Federal Reserve researchers,” said the report. Included in the report was an instance where one of the employees involved “attempted to transfer large volumes of data” to an external computer. A committee aide said it is unclear what data was involved or if the effort succeeded.

Another Fed staffer “provided modeling code to a Chinese university with ties to “China’s central bank,” according to the report. Again, there was no further detail provided as the whether the code or its distribution was restricted. In his letter, Powell noted the central bank’s “most important economic models” are in the public domain and are available for download from the Federal Reserve’s website “so that people can engage with us and these models.”

In perhaps the most blatant attempt to gather data, “a senior official at a Federal Reserve Bank” was “forcibly detained” in 2019 by Chinese officials during a trip to the country. Officials then told him amid threats of imprisonment that he “must cooperate … and share sensitive, non-public economic data.”

The Fed staffer reported the incident to the central bank, who then reported it to the FBI and State Department, according to the Republican report. It emphasized the Fed should work more closely with agencies like the FBI and strengthen its counter-intelligence efforts.