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The Hill
China is in default on a trillion dollars in debt to US bondholders. Will the US force repayment?
by Andrew Hale, Opinion Contributor – 07/04/23 7:00 AM ET
Every country should pay its sovereign debt. Default, we are told, is not an option.
But has anyone told China?
The United States pays interest on approximately $850 billion in debt held by the People’s Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.
Successive U.S. administrations have chosen to sidestep this fact, allowing business and trade with China to proceed as normal. Now that the relationship with China has soured and the People’s Republic of China has become the greatest adversarial threat to the U.S. and Western security, policymakers should revisit this appalling failure of justice.
Some history is in order. Before 1949, the government of the Republic of China (ROC) issued a large volume of long-term sovereign gold-denominated bonds, secured by Chinese tax revenues, to private investors and governments for the construction of infrastructure and financing of governmental activities. Put simply, the China we know today would not have been possible absent these bond offerings.
In 1938, during its conflict with Japan, the ROC defaulted on its sovereign debt. After the military victory of the communists, the ROC government fled to Taiwan. The People’s Republic of China was eventually recognized internationally as the successor government of China. Under well-established international law, the “successor government” doctrine holds that the current government of China, led by the Chinese Communist Party, is responsible for repayment of the defaulted bonds.
A private group of American citizens holds a large quantity of these gold-denominated bonds. This citizen-led group, the American Bondholders Foundation (ABF), serves as trustee with power of attorney for some 20,000 bondholders, whose bonds are valued at well more than $1 trillion.
Then-U.K. Prime Minister Margaret Thatcher’s tough negotiation stance on the return of Hong Kong to China led to a British settlement agreement on these same Chinese bonds in 1987. Thatcher said that for China to have access to U.K. capital markets, it had to honor the defaulted Chinese sovereign debt held by British subjects. Faced with that stark choice, China agreed.
Unfortunately, the U.S. failed to take such a common-sense stance. To this day, China has had access to U.S. capital markets while openly rejecting its sovereign debt obligations to American bondholders.
Lest anyone wonder about the age of these bonds, it is irrelevant. What matters is that this is a sovereign obligation. As recently as 2010 the German government made its last payment for reparations from World War I. In 2015 Great Britain made payments on bonds issuances that dated from the 18th century.
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Given that relations with China have deteriorated and there is bipartisan agreement on the threat from China, this matter can finally be acted upon by both Congress and the Biden administration. Getting settlement on this defaulted debt is not only right and just for the bondholders but, if done correctly, could also be a huge win for the U.S. taxpayer.
Andrew Hale is the Jay Van Andel Senior Policy Analyst in Trade Policy at The Heritage Foundation.
China is in default on a trillion dollars in debt to US bondholders. Will the US force repayment?
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The American Bondholders Foundation is a citizen-led organization that was founded in 2001 to advocate for the resolution and repayment of defaulted sovereign debt of the Peoples’s Republic of China that is held by 20,000 families in the United States.
The PRC has refused to pay the American holders of these bonds, despite settling with Great Britain in 1987.
What Is The Story?
Before 1949, the Republic of China issued a large volume of long-term sovereign bonds for the construction of infrastructure. In 1938, China defaulted on the bonds during the conflict with Japan. Under well-established international law, the “successor government” doctrine holds that the current government of China, the People’s Republic of China, is responsible for the repayment of the bonds.
In 1987, Prime Minister Margaret Thatcher forced payment from the PRC on behalf of British holders of these same bonds as a condition of allowing China access to U.K. capital markets.
The Time to Act is Now
- Senior members of prior U.S. administrations, as well as members of Congress, have vetted and confirmed the validity and defaulted nature of these bonds, yet to date, no U.S. administration has actively pursued repayment from the PRC.
- With the President’s approval, the U.S. Treasury has the existing legal authority to acquire the Bonds from ABF and use them to pay down the U.S. national debt to China.
- Congress should pass legislation requiring the PRC to abide by international norms and rules of finance, trade, and commerce, including transparency rules of capital markets and exchanges, and end its practices of exclusionary settlement, discriminatory payments, selective default, and rejection of the successor government doctrine of settled international law, or be barred, together with its state-controlled enterprises, from access to all U.S. dollar-denominated sovereign bond offerings.
https://www.americanbondholdersfoundation.com/
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