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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.

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 in daily interest 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.

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Originally posted by RogueJSK:
And like most instances where defaulted debt is purchased from another holder, they can likely acquire it for pennies on the dollar, which would lower the total cost from the full $1T.

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Originally posted by Fly-Sig:
Those bonds are debt owed to private citizens by China. If the government buys out the citizens it exchanges cash for bonds which could have been used instead to buy back US bonds (debt) held by China.

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Originally posted by RogueJSK:

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Originally posted by Fly-Sig:
Those bonds are debt owed to private citizens by China. If the government buys out the citizens it exchanges cash for bonds which could have been used instead to buy back US bonds (debt) held by China.

Unless the bearers of these defaulted bonds are willing to accept a lesser value. Like a doctor's office selling a defaulted medical debt to a collection agency for less than face value.

For example, acquire China's $1T debt for $500B and use it to offset our $850B debt, thus saving $350B plus no longer being under China's thumb and no longer being subject to $95M in daily interest.

A group of private citizens has little means to compel China to pay up, compared to the US government.

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China is in default on a trillion dollars in debt to US bondholders

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Originally posted by 220-9er:
The sooner we decouple everything we can from China and the CCP, the better.

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"The trouble with our Liberal friends...is not that they're ignorant, it's just that they know so much that isn't so." Ronald Reagan, 1964
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"Arguing with some people is like playing chess with a pigeon. It doesn't matter how good I am at chess, the pigeon will just take a shit on the board, strut around knocking over all the pieces and act like it won.. and in some cases it will insult you at the same time." DevlDogs55, 2014
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www.rikrlandvs.com

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Originally posted by Aglifter:
…But the article is a good try - I wonder if it was written by a bond holder/per the direction of one.

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Originally posted by RogueJSK:


However, the unmentioned complication here is that, since this is apparently all pre-PRC debt assumed by the PRC from the ROC, forcing this issue with the PRC would signal to our ally Taiwan (who holds themselves out to be the true ROC) that their claim to China is less legitimate. So there's another international relations complication to this quagmire too. But considering the US has formally recognized the PRC as the government of China since 1979, that may be moot nowadays.