BONUS: Gerard DiPippo on China’s Attempts to Infiltrate the Fed

Gerard DiPippo is a senior fellow with the economics program at the Center for Strategic and International Studies. Previously, he spent 11 years in the US intelligence community as a deputy national intelligence officer for economic issues at the National Intelligence Council and as a senior economic analyst at the Central Intelligence Agency. In this bonus segment from the previous conversation, David and Gerard discuss the recent Senate report which details the Chinese Government’s decade-long campaign to infiltrate the US Federal Reserve System. Gerard brings his expertise in both national security and monetary policy to this conversation with David to shed some light on this news story.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Gerard, thank you for coming back on.

Gerard DiPippo: Thank you for having me back.

Beckworth: Okay. So let me read a couple of the headlines. The first piece is the Wall Street Journal and the title is, "China Targeted Fed to Build Informant Network and Access Data, Probe Finds." And then Politico has a story titled, "China has targeted the Fed for more than a decade, Senate report charges." So let me read just a few paragraphs from the beginning of the Wall Street Journal article. And it says, "China tried to build a network of informants inside the Federal Reserve system. At one point, threatening to imprison a Fed economist during a trip to Shanghai, unless he agreed to provide non-public economic data, a congressional investigation found. The investigation by Republican staff members of the Senate Committee on Homeland Security and Governmental Affairs found that over a decade, Fed employees were offered contracts with Chinese talent recruitment programs, which often include cash payments and asked to provide information on the US economy, interest rate changes, and policies,” according to this report.

Beckworth: “In the case of the economist, the report said, Chinese officials in 2019 detained and tried to coerce him to share data and information on US government policies, including on tariffs while the US and China were in the midst of a trade war. “The report doesn't say whether any sensitive information was actually compromised. Access to such information could provide valuable insights given the Fed's extensive analysis of the US economy, its oversight of the US financial system, and the setting of interest rate policy… The Republican-led investigations said the Fed failed to mount an adequate response.” Okay, I will stop there. And again, initially it was pretty shocking to me. A Fed economist was detained in Shanghai and they tried to coerce him, threaten him into revealing information and it was a 10 year effort according to this report. So, what was your initial response to this?

Initial Response to the HSGAC Report’s Findings

DiPippo: Well, I'm not surprised. In fact, I would be much more surprised if China were not trying to spy on our central bank. It is well-established and the FBI and others have said this repeatedly that there are many initiatives underway to infiltrate pretty much any agency in the US government and major US corporations and others. The jargon is counterintelligence – CI, right? And the intelligence, maybe what we were talking about here is the CI risk from China is very high and the FBI is perfectly clear about that. I wasn't surprised broadly. The fact that they tried to detain and threaten a Fed economist while in China was not super surprising, but somewhat surprising to me. I think the report, it comes out of Congress. It is not from the FBI, nor is it from the Fed.

DiPippo: It is based on an investigation the Fed had launched based on signals that they had gotten from their own staff. They were worried about some of this activity. The report also highlights something called the Thousand Talents Initiative or Thousand Talents Plan, which is a Chinese central government initiative to harness foreign talent. The more anodyne name of it is Oversees High Level Talent Recruitment program, which is what it sounds like. They're trying to harness foreign expertise for technology innovation or policy. It's primarily aimed at the Chinese diaspora or ethnic Chinese, but it also sometimes goes after regular foreigners in areas of interest.

It is based on an investigation the Fed had launched based on signals that they had gotten from their own staff. They were worried about some of this activity. The report also highlights something called the Thousand Talents Initiative or Thousand Talents Plan, which is a Chinese central government initiative to harness foreign talent. The more anodyne name of it is Oversees High Level Talent Recruitment program, which is what it sounds like. They're trying to harness foreign expertise for technology innovation or policy.

Beckworth: Well, let's turn to Jerome Powell. What did he have to say about this? And according to the Wall Street Journal report, this is what they say, "Fed chairman, Jerome Powell, strongly disputed the report's findings and called its characterization of some employees unfair, ‘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.’ That's what he wrote in a letter to Senator Rob Portman of Ohio, the committee's top Republican. Mr. Powell detailed the central bank's information security and background screening protocols, including review of foreign travel and personal contacts for staff who have access to restricted information. ‘We take seriously any violations of these robust information security policies,’ he wrote." So, Fed Chair Powell was less concerned than the report authors are, and kind of the initial response on Twitter and the excitement that maybe I felt when I first read this, but let me spell out the name of the report for our listeners.

Beckworth: It's a minority staff report. As you mentioned, it's from the Committee on Homeland Security and Governmental Affairs. And the title is, " China’s Threat to the Fed: Chinese Influence and Information Theft at U.S. Federal Reserve Banks." They have an executive summary and they have some fact finding, and they provide examples like we've touched on. They talk about the individual being forcefully detained in China. They also talk about affiliations with the Chinese bank. So let me read this part. "The investigation found multiple US Federal Reserve employees with close ties to the People's Bank of China, PBOC. They also found ties to Chinese universities linked to the talent programs," which you've touched on already. "Connections to Chinese media outlets, unapproved data transfers." So that sounds very exciting.

Beckworth: Let me read that one. "One Federal Reserve bank employee with sensitive access to the Federal Reserve board data provided modeling code to a Chinese university with close ties to Central Bank of China, the PBOC. Another Federal Reserve bank employee attempted to transfer large volumes of data from the Fed to an external site in at least two separate instances. The individual had continuous contacts with Chinese nationals. The key finding of facts in the report are as follows: for over a decade, China has engaged in sustained malign influence and information theft campaign against the US Federal Reserve, taking advantage of America's open and collaborative research practices.

Beckworth: Number two, that Fed has been unable to counter China's malign influences in collection campaign effectively. Number three, the Fed lacks policies and procedures sufficient to prevent many of these influences in collection attempts. And number four, despite known ties to talent recruitment plans, Federal Reserve employees retain access to confidential information. So, they give a few more details than what we find in the news stories. But overall, I begin to find this a little underwhelming. I think it's important to recognize that there's this threat, the Chinese are coming after the Federal Reserve bank, as you mentioned, but I started thinking through what exactly could they get from the Fed that would be a threat to national security, maybe to our financial system? And what is your sense of that? What could they glean from this attempt at espionage that would be earth-shattering?

Should We Be Concerned?

DiPippo: Well, it seemed, based on the report, that what the Chinese were looking for was essentially information on Fed policy or broader US policy, including tariffs during the trade war. Some of that is not even the Fed's domain. For example, would the Fed know what then President Trump wanted to do with tariffs? And the answer is, not really.

DiPippo: You could really be focused on the White House itself, which they also were, I'm sure. There's the broader question of what information would, say, staff economists at the Fed have that could actually compromise national security or Fed policy? In general, the Federal Reserve is way, way more transparent than the Chinese Central Bank. The minutes from the FOMC meetings, while they are released with a lag, are fairly detailed. There are many Fed watchers out there tracking every statement by any Fed governor or various indicators. I don't know if this kind of access would actually give the Chinese much of an advantage. You could worry about things like cyber access, but that's different. Certainly, the importance of our actual technical systems is, especially the Fed, is crucially important, but that doesn't seem to be the focus of what these Fed economists are being asked to collect. It's just kind of general information about what the Fed might be thinking and how it might affect policy with regard to China. And I'm just not sure that it would really undermine you US policy in any meaningful way or give China that much of an advantage, but of course it doesn't prevent China from wanting it.

Certainly, the importance of our actual technical systems is, especially the Fed, is crucially important, but that doesn't seem to be the focus of what these Fed economists are being asked to collect. It's just kind of general information about what the Fed might be thinking and how it might affect policy with regard to China. And I'm just not sure that it would really undermine you US policy in any meaningful way.

Beckworth: Sure. Yeah. That was my takeaway, too, that at best the Chinese Central Bank could do some insider trading. They find out ahead of time what the Fed's going to do, but that's not a big national security problem. The one thing that you touched on this would be just the infrastructure of the payment system in the US that might understand it better and make us more susceptible to tax, to potential threats. I guess I was less blown away after I thought through this a little bit more than I was initially. I was very shocked, and it is shocking that a Fed economist would be detained in Shanghai and that is troubling. But you said not surprising that the Chinese are doing this in the US. I got a kick out of the one part where they said the modeling techniques were shared with a Chinese and as anyone who follows the Fed knows, the Federal Reserve - US model, FRB/US, is kind of an old school model with thousands of equations. If that's the model they shared, and the thing is, you can actually get that model yourself. You can download it from the Fed's website.

Beckworth: And there are lots of places that have modeling techniques. I mean, there's a great place in Germany at the Institute for Monitoring Financial Stability, and they have a macro-economic model database. They literally go out and collect all these different DSGE models from all around, from papers, and they put them together and you can run simulations there. The Chinese could go to this website and run the simulations for themselves. I found it humorous that they got a model, but overall, again, just not a big sense of, "Wow, they got this information. Now we're in trouble." It was more of a, "it's unfortunate, we need to do a better job to prevent it,” but it's not like they've sold our secrets to nuclear weapons or stealth technology or something like that.

DiPippo: Yeah. I think that's right. I mean, the Fed again is really transparent. A lot of their research is published. Internal deliberations are sensitive and you're right that, in theory, if you had access to that, you could essentially front run the Fed and make some money in the markets. I honestly would be surprised if that's the Chinese motivation here. I don't think the PBOC or generally the Chinese government is all that sophisticated of an investor, and that's not what they're looking for. And the report doesn't really even suggest that. It seems like they just want more general information on what the US is thinking. And the broad mandate for all Chinese collectors is just figuring out what is the US going to do next, right? And especially with China, but not limited to that. So again, not surprising they're doing this, but my worries are in no way higher today than they were yesterday, from reading this report.

Beckworth: Yeah. I just listened to a podcast today with Bill English and he was a former head of the monetary affairs division. And he talked about how over time, if you look at the members of the FOMC, how their information gathering processes change, it used to be they would just read staff reports from the Fed staff at the Federal Reserve. But now they go lots of places. They go to Twitter, they go to blogs, they read investment notes. And so, in a sense, they're also searching for information. And if the Chinese really wanted to know what they're thinking, just go through the open access, public data at the FedWatch, all the stuff out there that you and I follow on a regular basis. It's not as if there's some secret knowledge that's hidden at the Fed that is just earth-shattering and is going to change the world.

DiPippo: Yeah. I mean, you could have imagined, say 30 or 40 years ago when it was a much more insular institution and they were not as focused on public communication, that that information could be more valuable, but under Powell and his predecessors, the Fed has emphasized getting incrementally more transparent. I just read Ben Bernanke's book on the Fed in the 21st century, and he talks about that too, right? But then under Greenspan, it was actually kind of cryptic and opaque in some ways, but then over time they got more and more transparent. So, I don't know what the value would be or sort of the marginal value of all this information.

Beckworth: Now that's an interesting observation. So given its influence, the Federal Reserve is a very important institution, affects global economic conditions, but given that influence, there really aren't that many secrets to be had within the Federal Reserve compared to say your former employer or the Department of Defense or even the White House.

Internal deliberations are sensitive and you're right that, in theory, if you had access to that, you could essentially front run the Fed and make some money in the markets. I honestly would be surprised if that's the Chinese motivation here. I don't think the PBOC or generally the Chinese government is all that sophisticated of an investor, and that's not what they're looking for. And the report doesn't really even suggest that.

DiPippo: I mean, part of that is a function of the Fed being a unique institution, right? It's sort of a quasi-public entity, with private actors involved in it, right? And I can say that the Fed is not always forthcoming with information even to the US government. It treats itself as being proprietary. It's very defensive about its own independence, which might be in part why chairman Powell pushed back against this report in public, right? Doesn't like the accusation that Fed is not managing its affairs well, and somehow needs some kind of greater oversight over what its staff are doing, right? But it also means that the Fed has contacts with foreign central banks and negotiations that are not always privy to the entire US government, right? So how much cash the Fed is sending overseas or what the real-time negotiations might be over swap lines, that kind of stuff, may not be widely broadcast anyway, right? But the Fed is running its own show in some degree, but in terms of actual monetary policy, they're undoubtedly way more transparent than they used to be.

Beckworth: Earlier this week on your main show, we talked about life at the CIA and whether Jack Ryan characters are possible and you kind of shot that down, that analysts typically don't jump out of helicopters with machine guns. But this story did remind me of one of Tom Clancy's novels called Debt of Honor. Did you ever read that one?

DiPippo: I did not.

Beckworth: Okay. I think it's back in the 90s, it's a little bit older, but the story is that Japan strikes back. It remilitarizes, it surprise-attacks on the US fleet. And then it uses hackers to destroy the computer networks that are behind the stock market. Completely destroys all the information there. And then, this is amazing, it assassinates the Fed chair. That's the story. This is in the 90s. Now, I'm thinking like, "Oh, is this what the Chinese have in mind?" Clearly not. They don't have this in mind, but that story is just so fanciful. It's just so unreal. I mean, today we have backup networks for the networks and backups to the backups, and if something should happen to Chair Powell, I don't think it would be the end of the world for our US financial system. So once again, you're going to probably tell me, Tom Clancy's novels don't really match what would happen in the real world.

I am certainly comforted that the Fed was aware of this, right? It wasn't news to them. They were supportive of the investigation. And you could dispute whether the Fed's policies are good enough or not, but I would've been much more worried if the Fed said, "We are unaware of any Chinese efforts to gain access to our information or our economists." That's not what the Fed said. They are aware of the problem.

DiPippo: Well, my actual reaction to that is thinking how after the Cold War ended and before 9/11, a lot of fiction writers were really looking for a new enemy, right? And you're having to manufacture the idea that Japan would attack the Fed and try to kill the Fed chairman. They were running out of plot lines back then. You're right that there are backup systems, but I think definitely all financial services company, banks, others, not just the Fed, but everyone should definitely be worried about cybersecurity. They are aware of that though. I think it's something that certainly, it's a vulnerability that the Chinese in an extreme scenario might try to exploit. But again, I didn't get the impression from this report that's what they were trying to do there. And certainly no mention of them plotting to assassinate Chairman Powell.

Beckworth: Right. I shouldn't have probably brought this example up, but in my mind, I kind of wondered there when I read this story because of the only, again, feasible use of such knowledge would be maybe to attack the infrastructure and the other one was just insider trading.  In closing, any last thoughts about this news story?

DiPippo: I mean, look, in general, as someone said earlier, it's a case of a fairly closed system trying to spy on an open system as we are. And in an open system, it's just much easier to get information. And I think it's harder to actually interfere with policy because there are so many others trying to do so as well. And we know what those vectors are. I am certainly comforted that the Fed was aware of this, right? It wasn't news to them. They were supportive of the investigation. And you could dispute whether the Fed's policies are good enough or not, but I would've been much more worried if the Fed said, "We are unaware of any Chinese efforts to gain access to our information or our economists." That's not what the Fed said. They are aware of the problem. And I just think that's something that really all major US institutions should be aware of as well.

Beckworth: Well, wise words to end on there. Once again, thank you Gerard for coming back on this show. And listeners, if you haven't already, make sure you listen to the first episode with Gerard that came out on Monday. Thank you.

DiPippo: Thank you.

Photo by Matthew Walsh via Getty Images