China’s government targeted Federal Reserve employees in a decade-long infiltration campaign aimed at stealing monetary policy secrets from the nation’s central bank, a new report released by Republican Senator Rob Portman claims.
Since as far back as 2013, Chinese operatives have been attempting to recruit Fed economists into leaking sensitive information in exchange for money and other perks, per the report. The report states that the Fed’s internal investigations found that a group of up to 13 of its employees, dubbed the “P-Network,” had become entangled in the campaign.
In some instances, coercion was used to ensure compliance. One Fed employee was detained on four separate occasions during a visit to Shanghai in 2019, and his family was threatened. Phones were tapped, messaging app accounts compromised, and in some instances, attempts were made to download troves of highly-confidential internal data to external websites, according to the report.
“I am concerned by the threat to the Fed,” said Portman. “The risk is clear, I urge the Fed to do more, working with the FBI, to counter this threat from one of our foremost foreign adversaries.”
Yet Fed Chair Jerome Powell took issue with the report, defending the accused employees and asserting the institution can resist malign influence.
“We would be concerned about any supportable allegation of wrongdoing, whatever the source,” wrote Powell in a 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.”
Meanwhile, Liu Pengyu, a spokesperson for the Chinese embassy in Washington D.C., said that U.S. lawmakers’ were “full of Cold War zero-sum thinking and ideological prejudice.”
The report comes at a pivotal time both for the domestic economy and U.S. foreign policy. While investors fixate on the Fed’s impending interest rate hike, tensions between the US-China are soaring ahead of a planned visit by U.S. House Speaker Nancy Pelosi to Taiwan.
President Biden will hold a phone call with Chinese leader Xi Jinping on Thursday, July 28.
Better Defense Needed
The report urges Congress to pass the “Safeguarding American Innovation Act (SAIA)” to “protect American taxpayer-funded economic and financial research and intellectual property from foreign threats.” It also recommended that the Fed develop an all-encompassing strategy to counter the transfer of U.S. intellectual property and research and strengthen coordination with law enforcement and intelligence agencies.
“The Chinese government is using every tool at its disposal to infiltrate and steal valuable information,” Portman said. “We cannot let the American taxpayer continue to unwittingly fund China’s military and economic rise which is why our report makes strong recommendations to enhance and protect our Federal Reserve.”
The report concludes that maintaining a certain level of contact between the Fed and officials in China is necessary, considering such interactions enable central banks to coordinate on shared threats to the global economy. However, it is “imperative to balance collaboration with foreign institutions against national security interests,” the report concluded.
Policy Risks Mounting
The potential to infiltrate the Fed is just the latest risk to the U.S. economy from Chinese government activities.
The head of the FBI, Christopher Wray, has described Chinese economic espionage and counterintelligence as the “greatest long-term threat” to America’s “economic vitality.”
U.S. firms in China have long struggled with state-sponsored corporate espionage and intellectual property theft. Yet, in recent years, the hidden threats posed by Beijing to the U.S. financial system have begun to surface.
At an international level, China has worked to erode the dollar’s dominance by becoming partners with Russia in de-dollarization. As far back as 2014, the two countries began currency swaps and have since reduced the use of the greenback in bilateral trade, with the US-China trade war and the war in Ukraine accelerating the trend. More countries may follow Beijing’s monetary maneuvers with Moscow. The BRICS countries (Brazil, Russia, India, China, and South Africa) are reportedly considering launching a new world reserve currency based on a basket of their national currencies after a summit in June.
On the domestic level, American investors are also increasingly vulnerable to policy shocks emanating from Beijing.
China’s communist leaders launched a widespread crackdown on the private sector. This included cutting many of the country’s biggest tech giants down to size, especially those with vast amounts of sensitive data.
One of the most extreme events of China’s “techlash” was the downfall of the ride-hailing app Didi. The unicorn lost more than $60 billion in value – 80% of its market cap – within a year of going public after Chinese regulators targeted it for alleged violations of data security rules.
Wall Street Journal columnist Josh Rogin described this incredible destruction of shareholder value as a “watershed moment” for Wall Street. “Investing Americans' futures in Chinese companies is no longer a risk Wall Street can calculate, much less defend,” Rogin wrote at the time.
The great power contest between the US-China is set to escalate as national security concerns weigh down economic relations. The fact that fierce economic headwinds are currently battering both countries only raises the stakes higher. Investors will likely look to offset the burgeoning geopolitical risks inside their portfolios.
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This article was produced and syndicated by Wealth of Geeks.
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