It’s practically an international article of faith: Countries may not default on their sovereign debt. Yet China has done just that on $1 trillion it owes to U.S. bondholders. Is there nothing we can do about it?
Finding members of Congress willing to talk tough isn’t hard. Many resolutions and joint letters over decades have called for China to honor its debt to U.S. citizens. But too many members, their election coffers lined by Wall Street and other financial and business interests heavily exposed to China, leave it at that.
That makes the action of Sen. J.D. Vance (R-Ohio) all the more noteworthy. He recently introduced a bill to address the People’s Republic of China’s selective default on American bondholders of Chinese sovereign debt.
The bill follows Vance’s history of bipartisan work with senators such as Elizabeth Warren (D-Mass.) to call out Wall Street, as well as China, for its corruption and abuse of U.S. laws.
Some historical context is needed here. Before the People’s Republic of China was established in 1949, the Republic of China issued a large volume of long-term sovereign gold-denominated bonds, secured by Chinese tax revenues, for the construction of infrastructure and financing of governmental activities. China’s imperial government had done the same before the Republic of China was formed in 1912.
Following its defeat in the Chinese Civil War, the Republic of China’s government fled mainland China to Taiwan in 1949. The People’s Republic of China was eventually recognized internationally as its successor government. Under well-established international law, the “successor government” doctrine holds that, as the current government of China, the People’s Republic is responsible for repayment of the bonds issued by both predecessor governments, the Republic of China and previous imperial governments.
There is precedent for the PRC paying back this defaulted sovereign debt. British Prime Minister Margaret Thatcher’s tough stance led to a British settlement agreement on Chinese sovereign bonds owed to British bondholders, established in the Foreign Compensation Order of 1987.
As a result, the PRC Fund was established, and British bondholders of this debt were paid their due. Now our government should demand a settlement as well.
No other country has been permitted to continuously get away with defaulting on its sovereign debt while maintaining access to U.S. capital markets. After the Bolsheviks took power in Russia in February 1918, they repudiated all of the sovereign debt issued by the previous Tsarist government. This was unanimously condemned by allied powers at the time. British and French investors took massive losses on their investments in Russia. In 1914, 80 percent of Russian debt was held in France and 14 percent in the United Kingdom.
The Soviet Union remained true to its interpretation of communism and, unlike China, never sought to gain free access to Western capital markets until the accession of Mikhail Gorbachev and Perestroika. In 1986, the Soviet Union finally did agree to pay Tsarist-era debt held by UK bondholders in exchange for access to UK capital markets.
After the collapse of the Soviet Union in 1991, the Russian Federation agreed in 1996 to repay Tsarist-era sovereign debt held by successor-in-title French citizens. Russia saw the virtue of behaving correctly in a rules-based system of international finance.
The U.S. did not make the mistake of trading with the Soviet Union during the previous Cold War, as we have with the People’s Republic of China during our new cold war. As a result, we are now dangerously dependent on China, with politicians of all political stripes calling for “decoupling” or at least “de-risking” from China — reducing exposure to Chinese imports and investments, placing restrictions on Chinese acquisitions of U.S. land and assets, and holding China’s regime to account.
At a time when the supremacy of the post-war Breton Woods system and the U.S. dollar as the world’s reserve currency is being challenged by the BRICS countries, including China, China’s selective default against U.S. holders of its sovereign debt sets a dangerous precedent that other emerging nations could easily follow. This is not a domino chain that the U.S. can afford to see set in motion.
Vance’s bill would restrict China’s access to U.S. capital markets unless it respects international law and honors its debt to U.S. bondholders, just as it paid British bondholders of these very same defaulted Chinese sovereign bonds. In this way, Vance could be said to be channeling Margaret Thatcher’s iron will to force China to pay its defaulted sovereign debt.
Too many in the U.S. Congress and executive branch have been too soft on China for too long. Vance’s bill takes a historic step in addressing this selective default. Others in Congress should join these efforts.
Andrew Hale is the Jay Van Andel Senior Policy Analyst in Trade Policy at the Heritage Foundation.