Century-old Chinese bonds are new leverage against Communists
Even before COVID ravaged the U.S. economy, holders of 100-year-old Chinese bonds had high hopes that the trade war between the U.S. and China would help them get paid.
For 70 years, the Communist government in China has repudiated the debt.
Operating on the firm legal principle that sovereign debt is the obligation of succeeding legitimate governments, holders of $1 trillion in face-value Chinese debt that dates back to as far as 1912 were hoping President Trump would give them a little help.
As late as last year, however, the prospects looked dim.
“I think everyone who works for Trump at the Treasury Department thinks this is loony,” said law professor at Duke University and a sovereign-debt restructuring expert Mitu Gulati in August of last year.
But now that the U.S. is seeking punitive damages for the Chinese-induced COVID crisis, some think there might be a chance the get the administration interested in using the bonds as leverage, at least.
“I can’t help but be tickled pink, because at a legal level these are perfectly valid debts,” continued Gulati. “However, you’ve got to get a really clever lawyer to activate them.”
Well, you don’t really need a clever lawyer so much as a motivated president, well versed in finance, and maybe, a little luck at the courthouse.
President Trump is a “’promises made, promises kept’ president, and he said to my face that he was going to do this transaction, do this deal, and hold China accountable,” Jonna Bianco, president and chairwoman of the American Bondholder Foundation told FoxNews.
While most legal analysts think that it would be very difficult to get a legal judgment against China, the essence of the problem isn’t legal but rather political.
And at least one legal analyst likes the idea.
Dan Harris, an international lawyer and owner of the chinalawblog.com tweeted:
China owes US bondholders $1.6 Trillion from before the Communist Revolution. Now there’s talk of the United States withholding payment to China on China’s US Treasury holdings to force it to pay. This decoupling is really getting interesting.
The administration has thus far been silent on the issue. But there is precedent for negotiating a political settlement over the debts.
In 2002, the Bianco lobbied then-president Bush for settlement of the claims. At the time she cited the 1987 Hong Kong deal.
“In 1987, China paid Great Britain about $45 million [U.S. equivalent] for these very same bonds,” Bianco said according to the Pacific Business Journal. “It was part of the treaty to return Hong Kong to the People’s Republic of China. But [then] British Prime Minister Margaret Thatcher, the iron lady, made it clear to China it would not be allowed to trade in Great Britain’s markets until it honored its debt.”
The big difference is that in 1987 China wanted Hong Kong back, and $45 million was a small price to pay.
Today, it’s going to take a “yuge” effort by the Trump folks to make China pay off the debt, which of course will only benefit a small group of people.
So, I wouldn’t bank on it.
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