The United States’ next move in the trade war with China will reportedly be a surprising one, and shows some good historical knowledge, as reported by Bloomberg.
Allegedly, the US may revive 100-year-old Chinese bonds, which actually pre-date the People’s Republic of China, from when it was just the Republic of China.
They are largely defaulted, and China has never recognized the debt, but that hasn’t stopped many from wanting to cash them in.
President Trump, U.S. Treasury Secretary Steven Mnuchin, and U.S. Commerce Secretary Wilbur Ross actually met with bondholders, who are hoping that the POTUS would actually push their case in front of China as a way to pressure it.
How that would work remains a mystery, since China may simply say that it won’t recognize a debt pre-dating the current country.
Regardless, Jonna Bianco, a Tennessee cattle rancher who leads a group representing pre-revolutionary China bondholders and who has met with the president said:
“With President Trump, it’s a whole new ballgame. He’s an ‘America First’ person. God bless him.”
These bonds, are a sort of old-style “soft-power” tool, used to increase US influence through “dollar diplomacy” – help the country industrialize and at the same time improve relations with it.
Regrettably, thought for the bondholders, China refers to the bonds as part of its “Hundred Years of Humiliation,” when it was forced to agree to “unfair” foreign control.
The Republic of China, after the Imperial dynasty was overthrown in 1911 needed funds, and it sold a series of gold-backed bonds to fund the country. These are the bonds specifically that Jonna Bianco and others are hoping to leverage in the trade war. She even co-founded the American Bondholders Foundation (ABF) in 2001 to represent holders of pre-communist debt.
“The People’s Republic of China dismisses its defaulted sovereign obligations as pre-1949 Republic of China debt, but doing so contradicts the PRC’s claim that it is sole successor to the ROC’s sovereign rights,” Bianco said in an emailed statement to Bloomberg.
Bianco, probably for naught, has spent years researching the topic and recruiting high-profile proponents to the ABF side. These include Bill Bennett, who was U.S. Secretary of Education under Ronald Reagan; Brian Kennedy, senior fellow at the Claremont Institute; and Michael Socarras, Bush’s nominee for Air Force general counsel.
China is probably quite worried that Donald Trump may be added to that list and it will probably be prompted to, once again, just say it won’t recognize the bonds.
According to Bianco, China is in selective default, after in 1987 it actually paid out bonds to British investors in 1987 as part of the Hong Kong handover deal, negotiated by politicians far superior than what the US has right now, such as former Prime Minister ‘Irony Lady’ Margaret Thatcher.
In Bianco’s understanding, China should be prohibited from selling new debt on international markets, if it doesn’t pay out its current debt. In her estimation, China owns $1 trillion on the debt, which is roughly equivalent to what China holds in US treasuries.
“What’s wrong with paying China with their own paper?” Bianco said.
Unnamed people, cited by Bloomberg, familiar with the Treasury Department say the China bonds have been studied, but ABF’s suggestions—including the possibility of selling the defaulted debt to the U.S. government to then exchange with China—aren’t legally viable. Spokespeople for Treasury and Commerce declined to comment.
“I think everyone who works for Trump at the Treasury Department thinks this is loony,” says Mitu Gulati, law professor at Duke University and a sovereign-debt restructuring expert. “But I can’t help but be tickled pink, because at a legal level these are perfectly valid debts. However, you’ve got to get a really clever lawyer to activate them.”
And lawyers have tried, in 1979 there was a class action suit brought by holders of Hukuang railway bonds that actually brought the People’s Republic of China to a US court.
The suit was thrown out on the basis that the 1976 Foreign Sovereign Immunities Act, which allows U.S. courts to hear cases against foreign governments for commercial claims, could not be retroactively applied to bonds issued at the turn of the century.
This all actually relies on US jurisdiction, since if China simply says it refuses to acknowledge it, there’s no way to force it to, similarly to how the US disregards most of the international law bodies.
This possible move, more than anything resembles an exercise in futility, but time will tell.
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