The question of how much money China owes America is complex, involving both current debt and historical obligations. While the United States pays interest on roughly $850 billion in debt held by the People’s Republic of China, China is currently in default on its sovereign debt held by American bondholders. This situation, often sidestepped by previous U.S. administrations, warrants a closer look, especially given the increasingly adversarial relationship between the two nations.
For decades, China has accessed U.S. capital markets while simultaneously neglecting its sovereign debt obligations to American bondholders. Understanding the historical context and potential remedies is crucial for addressing this financial imbalance.
The History of Chinese Sovereign Debt
Before the rise of the People’s Republic of China (PRC), the government of the Republic of China (ROC) issued long-term, gold-denominated bonds to finance infrastructure and government activities. These bonds were secured by Chinese tax revenues. These bond offerings were essential to China’s early development. However, in 1938, during its conflict with Japan, the ROC defaulted on this sovereign debt.
Following the communist victory and the ROC’s relocation to Taiwan, the PRC became recognized as the successor government of China. Under international law, this “successor government” is responsible for repaying the defaulted bonds.
The American Bondholders Foundation
The American Bondholders Foundation (ABF), a private group representing approximately 20,000 bondholders, holds a significant quantity of these gold-denominated bonds. The ABF serves as trustee with power of attorney for these bondholders. The bonds are valued at well over $1 trillion.
The American Bondholders Foundation (ABF) represents approximately 20,000 bondholders.
The Thatcher Precedent: A Missed Opportunity for the U.S.
In 1987, then-U.K. Prime Minister Margaret Thatcher successfully negotiated a settlement with China regarding these same Chinese bonds during the return of Hong Kong. Thatcher insisted that China honor its defaulted sovereign debt to British subjects to gain access to U.K. capital markets. China ultimately agreed.
However, the U.S. failed to adopt a similar stance, allowing China continued access to U.S. capital markets despite its refusal to acknowledge its sovereign debt obligations to American bondholders. The age of these bonds is irrelevant; sovereign obligations remain, as demonstrated by Germany’s reparations payments from World War I as recently as 2010 and Great Britain’s payments on 18th-century bond issuances in 2015.
Potential Solutions for the U.S. Government
The Biden administration and Congress have an opportunity to enforce the principle that governments must honor their debts. Mirroring the U.K.’s approach, the U.S. should prioritize the repayment of China’s sovereign debt as a matter of national security. Two potential actions are being considered by members of Congress:
- Acquisition and Offset: The U.S. government could acquire the Chinese bonds held by the ABF and use them to offset a portion (or all) of the $850 billion in U.S. Treasurys owned by China. This would reduce the national debt and improve the U.S.’s global financial position. It would also reduce up to $95 million in daily interest payments to China.
- Legislative Action: Congress could pass legislation requiring China to adhere to international norms and rules regarding finance, trade, and commerce. This would include transparency in capital markets, an end to exclusionary settlement practices, discriminatory payments, selective default, and acceptance of the successor government doctrine under international law. Failure to comply would result in barring China and its state-controlled entities from U.S. dollar-denominated bond markets and exchanges.
A Call for Action
Despite bipartisan support in Congress for addressing China’s default, successive U.S. administrations have remained silent. This inaction, based on the assumption that China would eventually embrace Western norms, must cease. Given the deteriorated relationship and bipartisan consensus on the threat posed by China, Congress and the Biden administration must act. Securing settlement on this defaulted debt benefits bondholders and U.S. taxpayers, representing a significant win for the nation’s financial stability and security. The U.S. must ensure fair trade, uphold international law, and protect its financial interests in an increasingly competitive global landscape.
