In the realm of global finance, an age-old adage echoes through the corridors of power: every country should honor its sovereign debt, for default is deemed an unacceptable path. Yet, within this intricate web of international finance, there exists a glaring anomaly, one that few have dared to confront: China.
The United States, a behemoth of the global economy, finds itself in a paradoxical situation. It diligently pays interest on approximately $850 billion of debt owed to the People’s Republic of China. However, the stark reality remains that China stands in default on its sovereign debt, a debt held by American bondholders. It’s a paradox that successive U.S. administrations have skirted, allowing business and trade with China to proceed unfettered. But now, as the once-touted relationship with China sours, and the People’s Republic of China emerges as the greatest adversarial threat to U.S. and Western security, it’s time to revisit this unsettling failure of justice.
To comprehend the intricacies of this dilemma, we must delve into history’s annals. Before 1949, the government of the Republic of China (ROC) issued a substantial volume of long-term sovereign gold-denominated bonds. These bonds, secured by Chinese tax revenues, were instrumental in financing infrastructure and governmental activities. They were the cornerstone upon which modern China was built, a testament to the nation’s transformation.
But in 1938, amidst its conflict with Japan, the ROC defaulted on its sovereign debt. Following the communists’ triumph, the ROC government fled to Taiwan. The People’s Republic of China assumed the mantle of the legitimate government on the international stage, inheriting the responsibility for repaying the defaulted bonds. This principle is enshrined in well-established international law under the “successor government” doctrine.
However, a group of American citizens holds a significant quantity of these gold-denominated bonds. Represented by the American Bondholders Foundation (ABF), these 20,000 bondholders hold bonds valued at over $1 trillion. The historical parallel to this situation can be found in former U.K. Prime Minister Margaret Thatcher’s tenacious negotiation stance regarding Hong Kong’s return to China. Thatcher, in securing a British settlement agreement on these same Chinese bonds in 1987, laid down a clear condition: for China to access U.K. capital markets, it must honor its defaulted sovereign debt owed to British subjects. Faced with this ultimatum, China complied.
Regrettably, the United States chose a different path. To this day, China has enjoyed access to U.S. capital markets while blatantly disregarding its sovereign debt obligations to American bondholders. The age of these bonds is irrelevant; their significance lies in the sovereign obligation they represent. It’s worth noting that even in recent history, the German government made its final reparations payment for World War I in 2010, and in 2015, Great Britain honored bond issuances dating back to the 18th century.
Today, the Biden administration and the U.S. Congress possess a unique opportunity. They can champion the well-established international principle that governments must honor their debts. Like the U.K. in 1987, the U.S. must recognize that the repayment of China’s sovereign debt is vital to its national security interests. To that end, the U.S. government should consider one or both of two actions currently under discussion in Congress.
The first course of action involves acquiring the Chinese bonds held by the ABF and utilizing them to offset, either partially or entirely, the $850 billion-plus in U.S. Treasurys owned by China. This approach would not only lower the national debt but also enhance the United States’ global financial standing.
The second option entails passing legislation that compels China to adhere to international norms and financial, trade, and commerce rules. This would encompass abiding by the transparency regulations governing capital markets and exchanges, while also ending exclusionary settlement practices, discriminatory payments, selective default, and rejection of the successor government doctrine, all well-established in international law. Should China fail to meet these obligations, it would find itself, along with its state-controlled entities, barred from accessing all U.S. dollar-denominated bond markets and exchanges. This approach embodies common sense and mirrors the very actions that China would take if the roles were reversed.
Over the past two decades, bipartisan support in Congress has swelled for bondholders seeking to address China’s default. Multiple congressional resolutions have endorsed this cause. (thehill.com) Yet, successive U.S. administrations have maintained a conspicuous silence on this matter, deferring the issue and anticipating China’s eventual embrace of Western norms and values. However, the time for inaction has come to an end.
As the United States grapples with deteriorating relations with China and a bipartisan consensus on the threat posed by China’s actions, both Congress and the Biden administration have the chance to rectify this long-standing injustice. Settlement of this defaulted debt is not only a moral imperative for bondholders but, if executed judiciously, could emerge as a monumental victory for the U.S. taxpayer, rewriting the narrative of sovereign debt in the annals of international finance.