Is China a Threat to the Fed? A Critique of the Portman Report
Senator Rob Portman (R-OH), the ranking member of the Senate Homeland Security and Governmental Affairs Committee, released a new minority staff report on July 26 contending that, for more than a decade, China has made “a sustained effort . . . to gain influence over the Federal Reserve,” and that the Fed has failed “to combat this threat effectively.” Although the report (hereafter, the Portman Report) recognizes that a balanced approach toward relations between the People’s Bank of China (PBC) and the Fed is desirable, the rhetoric of the report heavily tilts toward zero-sum thinking— namely, that Chinese gains are U.S. losses.
The report, titled “China’s Threat to the Fed: Chinese Influence and Information Theft at U.S. Federal Reserve Banks” takes a strong position that China is guilty of targeting the Federal Reserve “to undermine American economic and monetary policy,” and that the Fed is complacent in failing to prevent those intrusions. There is some evidence to support the first accusation, although it is weak; but there is little evidence that the Fed is lax in protecting sensitive information. Indeed, in his letter to Portman, Fed Chair Jerome Powell states: “We are deeply troubled by what we believe to be the report’s unfair, unsubstantiated, and unverified insinuations about particular staff members.” He defends the Fed’s efforts to prevent leaks of confidential information while nourishing an environment conducive to scholarly engagement. As he put it,
Economic research is vitally important to central banks, and our economists often collaborate with other scholars here in the United States and around the world. All of that collaboration is undertaken with the aim of deepening and broadening our understanding of critical issues. . . . We post our most important economic models publicly on our website so that people can engage with us and these models. . . . However, information security considerations also shape this engagement.
The report makes two large errors: first, it appears to share with China misconceptions about how information could be used to help China and/or harm the United States; second, in the cases where China did seek nonpublic information that could be useful to China, the report wrongly accuses the Fed of failing to protect information that is sensitive.
This article examines the case against China, raises three major questions about the report, and finds that Fed Chair Powell’s criticism of the report is largely correct.
The Case against China
The Portman Report accepts the view that China is out to overtake the United States, both in terms of military capabilities and economic strength. It cites FBI Director Christopher Wray’s warning that:
The greatest long-term threat to our nation’s information and intellectual property, and to our economic vitality, is the counterintelligence and economic espionage threat from China. It’s a threat to our economic security—and by extension, to our national security. . . . China is engaged in a whole-of-state effort to become the world’s only superpower by any means necessary [Remarks at the Hudson Institute, July 7, 2020].
The minority staff report accuses China, or more accurately, the government and Chinese Communist Party (CCP) of using talent programs, such as the Thousand Talents Plan, to provide incentives for Fed policymakers and economists to take temporary posts at top Chinese universities and the PBC. Those individuals could then recruit other talented Fed staff. The report assumes that the express purpose of the recruitment programs is to extract information that China could use to undermine U.S. dominance in the global economy.
The original Thousand Talents Plan was aimed at attracting top scientists and technology experts to China in the hope of advancing scientific and technical knowledge in the drive to catch up to the United States and other developed countries. China’s lack of strong protections for intellectual property rights meant that such talent programs could result in theft of intellectual property, some of which may have military applications, and thus be a threat to U.S. security.
The Portman Report presents evidence that, as early as 2013, China began to use talent programs to motivate Fed officials and staff to visit China with the aim of gaining inside information. However, it is silent on exactly what that sensitive information might be and whether any confidential information was actually passed on to Chinese authorities.
The report draws on a Federal Reserve counterintelligence program, begun in 2015, which found that China “targeted employees at more than half of the Federal Reserve Banks.” Fed investigators identified 13 persons of interest (“the P-Network”), employed at eight Federal Reserve Banks, who were suspected of “having connections with known Chinese talent recruitment plan members” or who may have engaged in activities potentially harmful to U.S. monetary policy.
In examining several case studies from the Federal Reserve’s counterintelligence program, the Portman Report concludes that China has used “a number of tactics to target Federal Reserve officials” ranging “from outright threats and coercion” to less intrusive measures, including “talent recruitment programs, professorships at Chinese universities, paid travel to speak at conferences, and research collaborations.”
The following case studies, listed in the order they appear in the report, are drawn from the Fed’s investigation of the P-Network, and are used by the minority staff to illustrate the threat China poses to the Fed, and thus to U.S. economic and monetary security.
Forcible Detention of Fed Employee in China. The most notorious case concerns China’s detention of a Fed employee in Shanghai during a trip in 2019. Officials threatened to harm the employee’s family unless he provided nonpublic information about Fed policy, and his phone and computer were allegedly tapped. In addition, authorities intruded on his WeChat account to acquire information about other Fed staff. He was told, under threat of imprisonment, not to reveal this episode and to sign a letter to that effect. However, he never signed such a letter, and it remains unclear if any information was obtained by his interrogators, and if so, whether it had any value.
Collaboration with the People’s Bank of China. Several Fed economists were found to have “close ties” to the PBC. One individual, with expertise in macro modeling and monetary policy, was invited to work as a visiting scholar at the PBC. Although such exchanges are common among central banks, including the PBC, the minority staff presents this case as a threat to U.S. economic and national security. It remains unclear, though, exactly how such information could undermine U.S. monetary policy.
Use of Talent Programs to Recruit for Chinese Universities. China uses its talent programs to attract top monetary scholars, including those at the Fed, to the work in leading universities. The report is concerned that one Fed economist “acknowledged that he applied to the Thousand Talents Program in exchange for sponsorship” by a Chinese university.
Influence of Chinese Media. One Fed employee was found to have engaged with China’s Xinhua News Agency and offered to share articles and assist with media questions regarding Fed policy. The individual also had “unusual travel patterns in China” and “connections with Chinese talent recruitment programs.”
Unauthorized Transfers of Fed Data to China. The report singled out a Fed economist, with access to sensitive data, who “provided modeling code to a Chinese University,” which had ties to the PBC. Another Fed employee, with ties to Chinese nationals and universities participating in talent programs, “attempted to transfer large volumes of data from the Federal Reserve to an external site.” Previously, he had “received a request from an individual with ties to the Chinese Government for nonpublic information on three Federal Reserve Bank presidents’ views on rate hikes.”
Fed Support for Members of Talent Programs. Fed employees have nominated Chinese scholars for academic positions and awards. For example, a Fed employee recommended “a dean at Peking University for a significant award,” describing him as an expert on the “National Thousand Talents Program.”
Subterfuge and Tradecraft. The Portman Report pointed to “at least one” Federal Reserve employee who tried to evade investigators when confronted with allegations of improper collaboration with China. Another employee was accused of “lying about providing Chinese intelligence agents with confidential information in exchange for financial compensation.”
The report found that, “despite these long-running and brazen actions by Chinese officials and certain Federal Reserve employees,” the Fed was “unable to counter this threat effectively.”
A Critique of the Portman Report
Three major questions need to be addressed in analyzing the Portman Report. (1) Did China target the Fed for sinister purposes or is this all just an ordinary talent exchange? (2) Did China receive any information detrimental to U.S. economic and national security? (3) If China received sensitive/confidential information, was the Fed complicit or inadequately secure?
Did China Target the Fed for Sinister Purposes?
There is no doubt that Chinese officials and ranking CCP members may try to use talent programs to secure nonpublic information. This is particularly true in the case of science and technology. The report provides some evidence that it is also true in the case of monetary policy. The most sinister case is the detention of a Fed employee with the express purpose of gaining sensitive information. The other cases offered in the report are less onerous.
Did China Receive Any Information Detrimental to U.S. Economic and National Security?
In general, scholarly exchanges in the field of money and banking do not pose a threat to either U.S. economic or national security. However, the report paints a picture that undervalues such exchanges and overestimates the power China has to extract nonpublic information in the case of monetary policy. The report does not convincingly prove that the Chinese obtained any information that could compromise the conduct of Fed monetary policy or threaten U.S. security.
Was the Fed Complicit or Inadequately Secure?
The Fed has firm control over implementing monetary policy and is cognizant of the importance of maintaining its independence and credibility, though it is ultimately dependent on Congress for its authority. In contrast, the PBC is closely tied to a single-party state: the CCP and State Council play important roles in overseeing monetary and financial policies.
In his letter to Senator Portman, Fed Chair Jerome Powell defended the Fed’s safeguarding of sensitive information and denied any complicity in illegal dealings with the PBC. He expressed “strong concerns about assertions and implications” in the minority report, and assured Portman that “everything we do at the Federal Reserve is in service to our public mission to American households, businesses, and communities. We therefore have robust policies, protections, and controls in place to safeguard all confidential and sensitive information and to ensure the integrity of our workforce.”
Powell rejects the report’s findings, which are based on the Federal Reserve’s earlier counterintelligence investigation, which the Fed now disputes. As the minority report notes: “Since providing the initial P-Network counterintelligence analysis documents to the Committee in December 2020, the Federal Reserve now disputes many of its own prior findings.” Indeed, the Fed now argues that the earlier investigation “included many conclusory statements about employees . . . that may lack factual support” and that the Fed has “not been able to substantiate.” (Details are found in footnotes 173–74, in the report.) However, the minority staff is not convinced and argues there is no “sufficient basis” to overturn the report’s conclusions about China’s threat to the Fed. Consequently, a closer look at the allegations is warranted.
Reexamining the Case Studies
The following observations are notable in examining the case studies.
The minority staff did not prove that the phone of the Fed employee (dubbed “Individual A”) was tapped, that he provided Chinese officials with sensitive information, or that he signed a letter promising not to reveal the detentions that apparently occurred in Shanghai. Nor did the staff reveal the nationality of the employee. Yet the fact that he had a WeChat account makes it highly likely he is a Chinese national.
Collaboration with the PBC
The fact that Fed economists visit the PBC, or have short-term appointments, is not unusual. As Powell observes in his letter, it is common practice to collaborate with other central banks, including the PBC. There is no evidence that any Fed employee violated rules regarding confidentiality.
Likewise, there is no threat to either economic or national security by having Fed economists visit Chinese universities or participate in short-term exchanges. Developing such ties is useful in expanding China’s understanding of the importance of monetary stability in taming inflation. Indeed, the PBC continues to track monetary aggregates in implementing its monetary policy, with the objective of achieving long-run price stability.
The staff points out that one Fed employee had contacts with Xinhua News Agency. However, the fact that a single employee offered to share published research with Xinhua and help arrange for officials to visit the United States is not necessarily a crime, unless sensitive information was passed to the agency, which it was not. The individual was also accused of having “connections with Chinese talent recruitment programs” and “unusual travel patterns in China.” Again, it is apparent that this individual is a Chinese national, so it is not unusual for him to travel extensively in China or attempt to establish ties with Xinhua for educational purposes.
Unauthorized Transfer of Sensitive Data
In this case, the minority staff points to two potentially serious breaches of Fed’s security: (1) an employee with access to sensitive Fed data “provided modeling code to a Chinese university”; and (2) another Fed employee “attempted to transfer” Fed data to an external site, and “received a request” to supply Chinese officials with “nonpublic information on three Federal Reserve Bank presidents’ views on rate hikes.” Even if such information was transferred, it is unclear how it could be used to undermine U.S. monetary policy.
With regard to the first alleged breach, Fed models are generally available online, so no one needs to steal them. The Fed’s macro model of the U.S. economy—the FRB/US model—is readily available to anyone, including the Chinese. The Fed’s website clearly states that links are available for “the public to download FRB/US equations, documentation, data, simulation programs, and specialized model solution code.” Moreover, the Fed’s macro models have not provided reliable forecasts, so their value is often questioned (see, for example, David Price’s article, “Computer Models at the Fed”). Yet, it is fair to say that not all of the Fed’s modeling codes are publically available and that China—and Fed watchers the world over—would like them.
The Portman Report does not indicate what the “sensitive data” were, and nothing is said about the public availability of Fed models or their reliability. From reading the report, it’s clear that the individual in question (“Individual B”) is a Chinese national. He has close ties with the PBC and top Chinese universities. The modeling code he transferred was used for “academic research” at Peking University’s National School of Development.
With respect to the second alleged breach, the report merely says that the Fed employee (“Individual D”) “attempted” to transfer data to an external site. Whether any data was actually transferred is not mentioned, nor is the external site identified. His email was casual and contained no information that wasn’t already well known. It stated: “[Our Fed president] is very new, [and] more hawkish than the average crowd . . . but may be less so than Charles Plosser [president of the Philadelphia Fed].” It’s clear that Individual D is also a Chinese national. (Note: The caption for Figure 9 in the Portman Report mistakenly identified Individual D as Individual C.)
Fed Support for Talent Program Members
It is not unusual for the PBC and academic institutions to try to hire newly minted PhDs in economics from top universities and to offer visiting positions to talented Fed economists, especially Chinese nationals. The primary goal is to improve the quality of research and economic education in China, not to engage in the theft of Fed data and models, or to undermine U.S. economic or national security. In recommending highly qualified individuals for talent programs and academic positions at leading Chinese universities, Fed employees are not necessarily endangering Fed or U.S. security.
Subterfuge and Tradecraft
The report notes that “at least one Federal Reserve employee resorted to adversarial tradecraft” and another (“Individual E”) searched the internet “for articles relating to individuals arrested for economic espionage and lying about providing Chinese intelligence agents with confidential information in exchange for financial compensation.” That employee left the Fed for a visiting faculty position at Peking University’s National School of Development. Again, he was most likely a Chinese national. But there is no clear evidence that he violated Fed policy rules or jeopardized U.S. security.
No one denies that China violates intellectual property rights in science and technology. An earlier bipartisan report, “Threats to the U.S. Research Enterprise: China’s Talent Recruitment Plans,” from the U.S. Senate’s Permanent Subcommittee on Investigations, released in November 2019 by Republican Senator Rob Portman and Democrat Senator Tom Carper, provided a detailed analysis of how China uses talent recruiting plans, such as the Thousand Talent Program, to attract top scholars with the aim of becoming the world’s leader in science and technology.
However, the threat to U.S. national security and economic progress from the science and technology side does not easily transfer over to the Fed and monetary policy. The Portman Report, released in July 2022, does not offer compelling evidence that China is a threat to the Fed. Although there may be some cracks in the Fed’s information security system and compliance protocol, there is no crisis.
Fed Chair Powell, in his letter to Portman, makes a strong case that a free market in ideas—involving exchanges of scholars and the sharing of macroeconomic models—is beneficial to both the United States and China. The question, of course, is where to draw the line. The report doesn’t offer much guidance on that issue, but it does recommend the following:
“Congress should promptly enact the bipartisan Safeguarding American Innovation Act (SAIA).”
“The Federal Reserve should develop a comprehensive strategy to combat both illegal and extralegal transfers of U.S. intellectual property and research.”
“The Federal Reserve should enhance its relationship with Federal law enforcement agencies and members of the intelligence community.”
“The Federal Reserve must improve protection of confidential information.”
“The Federal Reserve should implement a ‘Know Your Collaborator’ culture.”
Those recommendations would expand the bureaucratic state and require significant outlays for a threat that the Fed itself thinks is considerably overstated. The Fed is already doing a satisfactory job in protecting propriety information. Improvements can always be made, but the rational rule is: “Don’t let the best be the enemy of the good.”
While the Portman Report sees China as a serious threat based on the Federal Reserve’s earlier counterintelligence investigation, the Fed now disputes that evidence. In his letter to Portman, Powell is adamant that the Fed works hard to ensure the security of sensitive information:
Federal Reserve staff with access to sensitive economic information undergo comprehensive background investigations conducted by outside investigators, which include a review of foreign travel and personal contacts history, and are briefed annually on their specific obligations to maintain that security. Each person annually affirms his or her understanding of and compliance with those policies and safeguards. We invest heavily in technology and people to continually access and refine our practices in order to carry out this work.
A careful review of the facts supports Powell’s position that the Portman Report is “unfair, unsubstantiated, and unverified” in its “insinuations about particular individual staff members.”
Finally, the report is filled with zero-sum thinking—namely, that Chinese gains are U.S. losses. The report thus concludes that “China is determined to attain global supremacy, undermining the U.S. economy in the process.” No wonder Liu Pengyu, minister counselor and spokesperson for the Chinese Embassy in Washington, DC, when asked about the report, stated: It is “full of Cold War zero-sum thinking and ideological prejudice.”
The Portman Report paints China as a “malign foreign influence” on the Fed. In particular, it argues that China is systematically trying to obtain economic information that may give Beijing an advantage in the ongoing battle to become the world’s dominant economic superpower. While there may be some truth to that claim, there is insufficient evidence to prove that the Fed is complacent in protecting sensitive data. As Fed Chair Powell noted in his letter to Portman, “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.”
While care must be taken to safeguard proprietary information, the Fed’s view, and that of many academics, is that such collaboration should be continued. Of course, we should not lose sight of the fact that the PBC reports to the State Council. It is part of the state apparatus and is aligned with the Chinese Communist Party (CCP). If China wants to become a global leader in finance, it needs a free market in ideas backed by a genuine rule of law and protection of private property rights, broadly conceived. Zero-sum thinking and ignoring the value of collaboration among monetary scholars runs counter to that objective.
Although the report concedes that some collaboration is valuable (“the Federal Reserve need not forgo contact with China altogether”), and recognizes that “it is imperative to balance collaboration with foreign institutions against national security interests,” it ends with a dire note:
China’s targeting of Federal Reserve officials appears rarely aimed at fostering legitimate collaborations, business arrangements, or research exchanges. Rather, China’s efforts seemed aimed at malicious, undisclosed, and illegal transfers of information that seek to undermine the United States.
Such rhetoric weakens U.S.-China relations, insults Fed officials who diligently work to protect sensitive information, and inflames Chinese nationalism. By over-emphasizing restrictions on the free flow of information, and ignoring the benefits of mutually beneficial exchanges of information, the Portman Report diminishes the chances for future collaborative arrangements between the Fed and PBC.
Finally, if the Fed adopted a more rules-based approach to monetary policy, such as the McCallum rule (see White 2022), the monetary regime would be more transparent and there would be less uncertainty about the course of monetary policy. The demand for “inside information” would lessen or disappear, and the FBI and congressional committees could focus on other matters that are more pertinent for both economic and national security.
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