$1.6T in century-old Chinese bonds offer Trump unique leverage against Beijing

By Jonathan Garber FOXBusiness

‘Americans pay their debts. China needs to do the same’

As the Trump administration seeks ways to penalize China for its handling of the COVID-19 pandemic, it need look no further than Tennessee.

The Lewisburg, Tennessee-based American Bondholder Foundation holds $1.6 trillion of century-old Chinese debt, including interest, dating to before the founding of the communist People’s Republic of China, that it wants the administration’s help in redeeming. There is an estimated $6 trillion or more of the debt outstanding worldwide.

The bonds were issued by the Republic of China — which ousted the imperial government in a coup — as far back as 1912 and backed by gold; they were defaulted on in 1938. The ROC government fled to Taiwan, where it remains the official ruling body, after Mao Zedong’s communist party took over following the 1949 end of the revolution.

Beijing maintains Taiwan is part of China, and under international law, successor governments are responsible for the debts of their predecessors.

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 FOX Business.

Bianco, who has power of attorney for 95 percent of the thousands of U.S. bondholders, said making China repay its debt would “not be punishment,” but rather a basic fundamental of international finance.

There’s international precedent for such a move: Prime Minister Margaret Thatcher ordered Beijing in 1987 to make good on the bonds owned by Brits or lose access to the British capital markets. Then-Chinese President Li Xiannian’s government obliged, reaching a settlement of 23.5 million British pounds.

By paying some bondholders and not others, Beijing is technically in selective default, according to the ratings of bond-risk firms Moody’s, Standard & Poors and Fitch. Until China pays, it cannot sell debt on the international market, Bianco said.

The U.S. and China normalized relations in 1979, but cables dating as far back as May 1973 viewed by FOX Business show the State Department told Beijing that while the debt didn’t have to be paid at that time, it would not be forgiven.

There have been attempts to litigate pre-Communist party bonds in the past.

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A class-action lawsuit brought by Hukung railway bondholders was thrown out in 1979 under the Foreign Sovereign Immunity Act, which establishes limits on lawsuits against foreign governments.

Since then, developments in a few cases have suggested sovereign immunity might not be as strong with regard to certain types of debt, but those cases could be tied to specific language within the bond contracts themselves.

“It’s a difficult suit to bring just because at this point, it’s really very old,” Odette Lienau, associate dean and professor of law at Cornell University, told FOX Business. “Technically, these don’t necessarily expire, but in practice, doing something like this is going to be difficult. You have to be legally creative with how you would do it.”

Bianco spent a year researching the issue and working with the White House, State Department, Securities and Exchange Commission, Federal Trade Commission, former Senate Majority Leader Bill Frist of Tennessee, former Congressman Bart Gordon and former Congressman Walter Jones when the American Bondholder Foundation was founded in August 2001.

While not widely accepted in international law, the doctrine of odious debt, which is akin to China’s argument, states national debt incurred by an illegitimate regime is not enforceable.

The U.S. made a similar argument when faced with the burden of Confederate obligations following the end of the Civil War. Congress in 1868 passed the 14th Amendment to the U.S. Constitution, which says “neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States.”

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While there’s a “plausible legal argument” for redeeming the bonds, Lienau said, it’s “politically difficult.” Bianco, who met with Trump and Treasury Secretary Steven Mnuchin about the matter in 2018 while the U.S. and China were negotiating a phase one trade deal, said the U.S. Treasury could take the bonds in and use them to offset the nation’s debt with China.

The U.S. might then say it considers the bonds paid, but China could still dispute that, bringing the two sides back to square one.

“Ultimately, this is going to have to be some kind of negotiated settlement if it gets taken up,” Lienau said. “If not, the U.S. just continues making the payments on the national debt.”

“Ultimately, this is going to have to be some kind of negotiated settlement if it gets taken up.”- Odette Lienau, associate dean and professor of law at Cornell University

A spokesperson for the Treasury Department did not respond to FOX Business’ request for comment.

The Foreign Bondholders Protective Council, established under former President Franklin Roosevelt in 1933, helps U.S. citizens collect on defaulted bonds from foreign governments and has settled 47 cases. If the group were to successfully resolve this case, it would be the 48th.

Bianco’s clients would be willing to take “pennies on the dollar,” she said, letting the rest go toward helping repay a national debt that has swelled to more than $25 trillion as policymakers have taken unprecedented action to shield the economy from fallout related to COVID-19.

The government has extended trillions of dollars of aid to combat record job losses and the sharpest contraction of the post-World War II era, caused by a virtual shutdown of the U.S. economy through stay-at-home orders intended to limit the virus’ spread.

Both the Trump administration and some members of Congress have in recent weeks been looking at ways to punish Beijing for what they call an insufficient initial response to COVID-19, first identified in Wuhan, China, at the end of last year.

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FOX Business learned on Monday that the administration is forging ahead with plans to divest $4 billion of worth of equity stakes in Chinese companies held by the Federal Retirement Thrift Investment Board. But other options are limited.

“There is almost no clean-cut tool that you can use to put pressure on China without hurting ourselves,” Xiaobo Lu, political science professor at Barnard College of Columbia University, told FOX Business.

Earlier this month, Sens. Martha McSally, R-Ariz., Marsha Blackburn, R-Tenn. and Steve Daines, R-Mont., introduced the Stop China-Originated Viral Infectious Disease Act, which, if passed, would give Americans the right to sue China for the damage COVID-19 has caused to the economy and human life.

Another group of senators, led by Lindsey Graham, R-S.C., have introduced the COVID-19 Accountability Act, which would give Trump the authority to impose sanctions and travel bans, restrict loans to Chinese businesses by U.S. firms and ban Chinese companies from listing on U.S. stock exchanges.

Lu pushed back on the feasibility of those options, however, noting that the U.S. has “already done quite a bit” in terms of sanctions and that Chinese companies can list their shares in other international markets.

Fighting to collect payment on the aging Republic of China notes would have none of those drawbacks, though it might prove as arduous a struggle as negotiating a trade deal. Still, Bianco says, the U.S. would have the weight of common law and moral responsibility on its side.

“Americans pay their debts,” Bianco said. “China needs to do the same.”

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