China’s Trillion Dollar Debt Default: A Blow to US Bondholders and a Flawed Response |

Each nation should settle its external debt. We are informed that default is not an option. But has anyone informed China?

On the roughly $850 billion in debt that the People’s Republic of China owes, the United States pays interest. But right now, American bondholders who own China’s sovereign debt are experiencing default.

As a result, business and trade with China have continued unabated under successive U.S. administrations. Policymakers should take another look at this horrific injustice now that relations with China have soured and the PRC is the biggest adversarial threat to the security of the U.S. and other Western nations.

We should go back in time. Prior to 1949, the Republic of China (ROC) government issued a sizable amount of long-term sovereign gold-denominated bonds to governments and private investors to fund the development of infrastructure. These bonds were secured by Chinese tax revenues. In other words, without these bond issuances, the China we know today would not have been possible.

The ROC missed payments on its debt in 1938 because of its war with Japan. The ROC government fled to Taiwan following the communists’ military victory. In the end, China’s successor government, the People’s Republic of China, received recognition on a global scale. The “successor government” doctrine asserts that the current Chinese government, headed by the Chinese Communist Party, is liable for the repayment of the defaulted bonds under well-established international law.

Large numbers of these gold-backed bonds are held by a private group of American citizens. For about 20,000 bondholders, whose bonds are worth well over $1 trillion, this citizen-led organization, the American Bondholders Foundation (ABF), acts as trustee with power of attorney.

A British settlement agreement on these same Chinese bonds was reached in 1987 as a result of the then-U.K. Prime Minister Margaret Thatcher’s firm stance in the negotiations over Hong Kong’s return to China. According to Thatcher, China must pay back the defaulted Chinese sovereign debt that British citizens hold in order for China to access the capital markets in the United Kingdom. China decided to go with that difficult option.

Unfortunately, the U.S. did not adopt such a sensible position. Despite openly rejecting its obligations to American bondholders, China has continued to have access to the American capital markets.

It doesn’t matter how old these bonds are, in case anyone was wondering. It is important to remember that this is a sovereign duty. Germany’s government only recently completed paying its final World War I-related reparations in 2010. 2015 saw payments from Great Britain on bonds issued in the 18th century.

Governments must honor their debts, a long-standing international principle, and the Biden administration and U.S. Congress have a rare opportunity to put it into action. Similar to how the United Kingdom did in 1987, the United States must see China’s debt repayment as crucial to its interests in national security. The U.S. government should then take one of the two measures that are currently being discussed by members of Congress, or both.

The first would be to buy the Chinese bonds currently held by the ABF and use them to partially or fully offset the $850 billion or more in U.S. Treasurys that China owns (thereby lowering the up to $95 million in daily interest that China would otherwise pay). In addition to improving the U.S.’s financial standing abroad, this would reduce the national debt.

The second would be to enact legislation requiring China to adhere to global standards and laws governing finance, trade, and commerce. This would entail abiding by the capital market and exchange transparency regulations as well as stopping its exclusionary settlement, discriminatory payment, selective default, and denial of the successor government doctrine of established international law. All U.S. dollar-denominated bond markets and exchanges would be closed to China and its state-controlled entities if it doesn’t fulfill these obligations.

Again, this is common sense and exactly what the Chinese government would do if the situation were to change.

In Congress over the past two decades, there has consistently been bipartisan support for bondholders’ efforts to address China’s default through a number of congressional resolutions. Despite this, successive American administrations have remained silent on the matter, preferring to push it down the road in the hopes that China would eventually liberalize and adopt Western standards and values.

Now is the time to stop this inaction.

It is now possible for Congress and the Biden administration to take action on this issue because of the deterioration in ties with China and the bipartisan consensus on the threat it poses. In addition to being fair and proper for the bondholders, settling this defaulted debt could result in a significant benefit for the American taxpayer if handled properly.

China’s Trillion Dollar Debt Default: A Blow to US Bondholders and a Flawed Response |

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