Time for the US to Hold China Accountable for Sovereign Debt

Every nation ought to settle its sovereign debt. We are informed that default is not an option. Yet, has anybody told China? The People’s Republic of China owes the United States approximately $850 billion in interest. However, American bondholders hold China’s sovereign debt, which is currently in default.

This fact has been ignored by subsequent administrations in the United States, allowing normal trade and business with China to continue. Policymakers ought to reconsider this appalling failure of justice now that the relationship with China has soured and the People’s Republic of China has emerged as the greatest adversarial threat to Western and American security.

It’s time for some history. Prior to 1949, the Republic of China (ROC) issued a large quantity of long-term sovereign gold-denominated bonds to private investors and governments for the construction of infrastructure and financing of governmental activities. These bonds were secured by Chinese tax revenues. Set forth plainly, the China we realize today could never have been conceivable missing these bond contributions.

The ROC defaulted on its sovereign debt in 1938, during the conflict it was having with Japan. The ROC government fled to Taiwan after the communists won their military victory. In the end, the People’s Republic of China gained international recognition as China’s new government. The “successor government” doctrine holds that the current Chinese government, led by the Chinese Communist Party, is responsible for repaying the defaulted bonds in accordance with established international law.

These gold-denominated bonds are held by a small group of private Americans. The American Bondholders Foundation (ABF), a group led by citizens, is the trustee with power of attorney for around 20,000 bondholders whose bonds are worth well over $1 trillion.

A British settlement agreement on the same Chinese bonds was reached in 1987 as a result of Margaret Thatcher, the then-prime minister of the United Kingdom,’s tough negotiation stance regarding the return of Hong Kong to China. Thatcher stated that China needed to honor the Chinese sovereign debt held by British subjects that had defaulted in order to gain access to the capital markets in the United Kingdom. China agreed when presented with that stark choice.

Sadly, the United States did not adopt such a sensible stance. Despite publicly rejecting its sovereign debt obligations to American bondholders, China continues to have access to U.S. capital markets today.

It doesn’t matter how old these bonds are, just in case anyone is curious. The fact that this is a sovereign obligation is what matters. In 2015, Great Britain made payments on bonds issued in the 18th century, and the German government made its final payment for World War I reparations in 2010.

The Biden administration and the Congress of the United States have a one-of-a-kind opportunity to uphold the internationally recognized principle that governments must pay their debts. The United States must view the repayment of China’s sovereign debt as essential to its interests in national security, just as the United Kingdom did in 1987. The United States government ought to take one, both, or neither of the two actions that are currently being discussed by members of Congress.

The first would be to acquire the Chinese bonds held by the ABF and use them to offset (partially or completely) China’s ownership of more than $850 billion in U.S. Treasury securities, thereby lowering the amount of daily interest paid to China by up to $95 million. The national debt would be reduced, and the United States’ financial situation would improve globally.

The second is pass regulation that expects China to keep worldwide standards and rules of money, exchange and business. This would include adhering to the rules governing capital markets and exchanges’ transparency, ending its practices of exclusionary settlement, discriminatory payments, selective default, and rejecting the doctrine of settled international law that the successor government has adopted. All U.S. dollar-denominated bond markets and exchanges would be closed to China and its state-controlled entities if those obligations are not met.

Again, this is just common sense, and the Chinese government would do exactly this if the situation were reversed. Throughout the course of recent many years, there has been repetitive bipartisan help in Congress for bondholders to address China’s default with a few legislative goals. Notwithstanding this, progressive U.S. organizations have been quiet on this issue, deciding to put the issue off indefinitely, expecting that China would ultimately change and embrace Western standards and values.

This inaction must end immediately.

This issue can finally be addressed by both Congress and the Biden administration due to the deterioration of relations with China and the consensus among both parties regarding the threat posed by China. Not only is it right and just for bondholders to get a settlement for this defaulted debt, but if done correctly, it could also be a huge win for the taxpayers of the United States.