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Will China Pay the $1 trillion it Owes Americans?

Jonna Bianco of American Bondholders Foundation with pre-1949 Chinese Bonds

Richard Parker, a frequent contributor  to the McClatchey –Tribune group ,has published the first national media revelations  of the pre-1949 defaulted Chinese debt  of nearly $1 trillion owed more 20,000 Americans. Debt, that if resolved, might  result in a boon to the US economy and lower our national debt at virtually no cost to American taxpayers.   In “China’s Secret? It owes Americans nearly $1 trillion”, Parker notes in his opening stanza  how this boon to the US economy could be implemented with a stroke of President Obama’s pen:

China has a secret: It owes American investors hundreds of billions of dollars.

The Chinese government doesn't like to talk about it and the U.S. government doesn't want to raise it. But decades ago, Beijing defaulted on debt owed to Americans, as well as investors and governments around the world. In one case, it was paid. In the rest it was not. More than 20,000 American investors own this debt. The U.S. government may also own Chinese war debt, unpaid since World War II.

With the simple stroke of an executive proclamation, President Barack Obama can begin the process of addressing this issue. A 1930s-era law has established a quasi-public agency within the Securities and Exchange Commission, known as the Corporation of Foreign Securities Holders, which can arbitrate this dispute, much as a predecessor agency did for decades. China can both afford and benefit from this solution; it will afford goodwill at a time when relations between the world's two superpowers are strained.

 We have followed the debate on this issue raised by the American Bondholder Foundation and championed by the group’s head, Jonna Bianco, a Tennessee grandmother and cattle rancher.  We posted on the  history and prospects of selective default of pre-1949 Chinese debt issued by the Republic of China and the decades of litigation and lost opportunities to resolve it, “How to Reduce the Federal Deficit by $750 Billion”.  We noted:

One potential means of redressing the budgetary imbalance and preserving some of the valued entitlement benefit programs might lie in negotiations between our Government and the Peoples Republic of China (PRC) over repayment of sovereign indebtedness issued prior to the 1949 takeover by the PRC. This despite the fact that the PRC has subsequently issued sovereign debt in the world’s capital markets including thousands of bonds to American investors. Currently, China owes over $750 billion in indebtedness to American bondholders holding full faith and credit sovereign bonds sold them by the Republic of China (ROC). The PRC refused to honor financial obligations under recognized international and commercial law. Americans holding defaulted full faith and credit obligations of the Chinese Government are therefore dependent upon the Executive branch to negotiate a resolution of claims. In 1979 the PRC settled claims of Americans whose property was confiscated or nationalized by the PRC. The Chinese Government has refused to recognize the claims of American bondholders who hold Chinese debt issued prior to 1950. This despite the fact that the PRC reached a settlement with the United Kingdom in 1987 on behalf of British holders of similar defaulted Chinese bonds.

          [. . ]

The American Bondholders Foundation, LLC (hereafter “ABF”) which represents thousands of Americans in more than 43 states holding defaulted pre- 1949 sovereign Chinese debt believes the impact would be significant. If China paid, for example, just one-third of the face amount of defaulted sovereign debt of the prior ROC regime, that would amount to an infusion of more than $250 billion into the US economy of which the US ABF pool would receive $100 billion. Another $100 billion would be distributed to states at approximately $2 billion each, while $50 billion would be used to extinguish the indebtedness of non-US holders of such Chinese debt. There would be several billions paid in both federal capital gains and state taxes by American holders of these Chinese bonds. Further, fully 25 percent of the amount collected by the ABF US pool would be contributed to ABF charities, a 501 c3 organization devoted to humanitarian projects across America. All this without additional federal government stimulus programs or raising taxes, while alleviating both federal and state debt.

The Parker article addressed the means available to the Obama Administration to resolve the defaulted pre-1949 Chinese debt and boost the economy:

The U.S. government has a legal obligation to its citizens. The 1933 Securities Act established both the Foreign Bondholders Protective Council, under State and Treasury, and the Corporation of Foreign Security Holders, under the SEC, to get foreign governments to address debts owed to private U.S. investors. Housed in a Virginia suburb, the council in 47 instances settled the debts of foreign governments, including communist ones, to U.S. citizens. In 1975, the Polish government paid U.S. investors one-third the face value, or $8.5 million, of nine different series of bonds, all inherited from previous governments.

Indeed, President George W. Bush's counsel directed the bondholders to the council in 2001 but the council did nothing, most likely to keep from rocking the bilateral U.S.-China boat. Now, the council is shuttering its doors, as it has completed dozens of cases and no administration wanted to refer the Chinese case for fear of upsetting Beijing again. However, the Corporation of Foreign Security Holders is still on the books and represents the only chance for U.S. investors to be paid.

All that has to happen is that President Obama issue a proclamation to stand up the corporation, and a staff, at the SEC. The bondholders would bring their bonds in for examination and verification of the certificates and serial numbers. Then the corporation could get about settling the issue through payment, reissue of bonds, restructuring or even settling the debt. Many of these people are not wealthy investors but just everyday citizens. Bianco herself is a Tennessee cattle farmer.

But it appears our Treasury Department is not keen on this issue given overarching goals of opening up the vast Chinese market to US financial service concerns in exchange for entry of Chinese financial investment in US institutions.  Parker references a letter sent by Republican US House member Gary Miller to the Treasury.  Congressman Miller received a response from Undersecretary of The Treasury for International Affairs, Dr. Lael Brainard dated May 11th.  Her response to Congressman Miller focused largely on meetings held earlier this month in Beijing endeavoring to secure commitments from the PRC to open up their financial sector to US banks and financial services firms.

Brainard attached a memo to this letter to Congressman Miller illustrative of how the Treasury views the pre-1949 Chinese debt default issue as a dead issue.  The memo indicated that the Treasury Department doesn’t hold any pre-1949 Chinese bonds in its foreign exchange reserves, nor, to its knowledge, does any other US government agency hold these bonds. Brainard’s memo indicates that it has no information on how many American citizens hold pre-1949 Chinese bonds. It   categorically states that the US government has “no legal obligation to help bondholders seek and obtain settlement of defaulted bonds”.  The memo goes on to note:

In 1970, the Foreign Claims Settlement Commission (FCSC), a quasi-judicial, independent agency within the Justice Department, considered a claim on defaulted pre-1949 Chinese Bonds under the International Claims Settlement Act of 1949. In FCSC Decision No. CN-47 dated March 18, 1970, the FCSC concluded that the bonds at issue had been in default since 1939 and the claims based on those bonds did not come under the purview of the Act, and accordingly denied the Claim.

Moreover, when queried by Congressman Miller about “whether the PRC has any obligation to satisfy these bonds, in whole or in part”, the Undersecretary’s  answer was that “The Treasury Department has no view as to whether the current Chinese Government has any obligation to satisfy pre1949 bonds”.

With the Congress about to take up the nettlesome issue of another increase in the national debt ceiling, and concerns about stimulating job growth in a slow growth economy, it appears the matter of selective default of pre-1949 Chinese bonds will not be taken up by Treasury, or any other agency of the Obama Administration.  Dr. Brainard’s perfunctory reply to Congressman Miller contrasts sharply with her effusive expressions of hope that China will lift barriers to entry by major banks and Wall Street financial concerns to exploit huge opportunities in the Chinese economy.  This effectively gives short shrift to main street citizens seeking to have their holdings of pre-1949 Chinese bonds repaid by the PRC. A PRC that has ironically gone to great lengths to lower US public debt ratings.  A swap of these pre-1949 Chinese bonds for some of the trillions of US debt held by Beijing in any selective default scheme would be a win-win solution.  Thus, it would appear that reviving the matter with its significant economic benefits to Main Street is not in the best interests of the Obama Administration.  After all, the President’s  2008 election campaign  raised more than $42 million from those banks and investment firms salivating at the golden opportunity of entering the vast Chinese marketplace.