From 1900 to 1940, the Chinese Government issued millions of dollars in sovereign debt – most notably, a large tranche of £25,000,000 issued at 5% in 1913 set to mature in 1960. This massive bond funded the modernization of China’s infrastructure and was widely acquired at the time by governments, banks, and investors across the globe. However, in 1938 China defaulted on its "binding engagement upon the Government of the Republic of China and its Successors," leaving millions of global creditors unpaid. In accordance with the terms of the bond, successor government doctrine, and accounting standards, the United States can and should hold China accountable to its obligations.
WHO HOLDS THE BONDS:
The Chinese bonds in question are held throughout the world by treasuries, banks, companies, and over 20,000 private U.S. investors – many of which are active in seeking remuneration. Critically, the U.S. Treasury and Departments of Justice and State are understood to hold substantial portions of this Chinese sovereign debt. These holdings have not been fully cataloged nor has the U.S. Government moved to hold China accountable for its debt obligations.
HOLDING CHINA ACCOUNTABLE:
China is eager to be recognized by the international trade and financial community as a market economy. However, in order to be regarded as a responsible and reliable participant in international commerce and finance, China must acknowledge and rectify its multiple transgressions against the United States and WTO:
VIOLATION OF SUCCESSOR GOVERNMENT DOCTRINE: It is well established, as a matter of international law, that a successor government is responsible for the payment of sovereign debt obligations of a predecessor government.1
WORLD TRADE ORGANIZATION VIOLATION: China's refusal to honor its sovereign debt obligations violates its obligations as a member of the World Trade Organization – a membership that requires China to abide by accepted international legal norms, yet action has not been taken against China on this account.
AFFIRMATIVE CONCESSION OF OBLIGATION: The Peoples
Republic of China (PRC) has flouted the international community by refusing to pay this debt since 1938. However, the PRC made good on its British obligations in 1987 by paying over £20 million of its bond and property obligations in order to receive normalized access to the British markets in June of 1987.2 This affirmative accession should be applied to U.S. bond holdings equally.
SECURITIES AND EXCHANGE COMMISSION (SEC) VIOLATIONS: China and numerous state-owned and controlled Chinese enterprises (SOEs) participate in U.S. capital markets and constitute “issuers” under U.S. securities law yet omit substantial “material” information (i.e. selective debt default) that a reasonable investor would find to be important in determining whether to purchase the applicable securities.3
CHINA’S INCOMPLETE CREDIT RATING: The Nationally Recognized Statistical Rating Organizations (NRSROs) consistently accord artificially high ratings to long-term foreign currency debt of the Chinese Government and do not recognize China’s actual “selective default” rating.
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FULL AND ACCURATE INVENTORY: Compel the U.S. Departments of State, Justice, and Treasury to fully account for the entirety of their 1900-1940 Chinese Government Bonds in order to facilitate a state-to-state debt swap.
SEC ACTION: Direct the SEC to compel the Credit Rating Agencies (CRAs) to account for the full history of China’s debt, leading to a “selective default” and direct the Chinese State Owned Enterprises to disclose their material defaults.
DEPARTMENT OF COMMERCE: As cited in HR 639 and S 328, direct the Department to include currency manipulations as “countervailable subsidy” and thus affects China’s status with the WTO and the U.S. capacity to wage sanctions.
DEPARTMENT OF STATE: Direct the Office of the Legal Advisor to initiate full and direct communication with its PRC counterpart to resolve China’s sovereign debt with its American bondholders, inclusive of public and private entities.
1See Restatement (Third) of the Foreign Relations Law of the United States, § 712(2) (1986)
2China, Britain Settle Claims, New York Times, June 8, 1987
3See 17 C.F.R. § 230.405 (SEC Rule 405); id. § 240.12b-2 (SEC Rule 12b- 2)