Originally published July 4, 2023 12:00 pm PDT
China is currently in default on its sovereign debt to American bondholders, an uncomfortable reality that successive U.S. governments have been willing to ignore, allowing business and trade to continue.
Now, as the U.S. finds its relationship with China increasingly strained and China emerging as a major security threat, it is time to address this glaring oversight, according to a report from The Heritage Foundation’s Andrew Hale.
Delving into history, Hale explains that the government of the Republic of China (ROC) before 1949 had issued substantial amounts of long-term sovereign gold-denominated bonds.
These bonds, secured by Chinese tax revenues, were sold to private investors and governments for infrastructure development and state financing.
It’s clear that these bond offerings played a crucial role in shaping the China we know today.
In the midst of the conflict with Japan in 1938, the ROC defaulted on its sovereign debt.
Post the victory of the communists, the ROC government took refuge in Taiwan.
Eventually, the international community recognized the People’s Republic of China as the rightful successor government.
According to the “successor government” doctrine of international law, it is the present Chinese Communist Party-led government that holds the responsibility for repayment of the defaulted bonds, according to Hale.
A considerable number of these gold-denominated bonds are in possession of a private group of American citizens.
Representing around 20,000 bondholders, the American Bondholders Foundation holds bonds valued at more than $1 trillion.
Despite defaulting on its sovereign debt obligations to American bondholders, China continues to have unhindered access to U.S. capital markets.
Hale argues that the U.S. government, under the Biden administration, and Congress are now presented with a unique chance to uphold the international law stating that governments must honor their debts.
U.S. policymakers should consider two potential actions:
One strategy would be to procure the Chinese bonds from the ABF and use them to offset the $850+ billion in U.S. Treasuries that China currently owns.
This could reduce the national debt and improve the U.S.’s global financial standing.
Alternatively, or additionally, Congress could enact legislation that compels China to adhere to international financial, trade, and commerce norms.
Should China fail to meet these obligations, the legislation could prevent China and its state-controlled entities from accessing all U.S. dollar-denominated bond markets and exchanges.
Over the past 20 years, there has been consistent bipartisan support in Congress for bondholders to take action against China’s default.
However, previous U.S. administrations have chosen not to confront this issue, optimistically hoping that China would gradually liberalize and adopt Western norms and values.
But the time for inaction has passed, says Hale.
With the worsening U.S.-China relations and the consensus on China as a security threat, this issue can no longer be put on hold by Congress or the Biden administration.
Resolving this defaulted debt issue would not only be fair to the bondholders but could also yield significant benefits for the U.S. taxpayer, if handled appropriately.
