China defaults on trillion dollar debt to US, repayment uncertain

China is currently in default on its sovereign debt held by American bondholders, according to a recent opinion piece in The Hill. The United States pays interest on approximately $850 billion in debt held by China, but China has not fulfilled its own debt obligations to American bondholders. This issue has been largely ignored by successive U.S. administrations, but the current strained relationship with China and its status as an adversarial threat to the U.S. and Western security necessitates a reconsideration of this failure of justice.

Before 1949, the Republic of China (ROC) issued bonds secured by Chinese tax revenues to fund infrastructure projects and governmental activities. These bonds were crucial to the development of modern-day China. However, during the conflict with Japan in 1938, the ROC defaulted on its sovereign debt. After the communists took power and the ROC government moved to Taiwan, the international community recognized the People's Republic of China as the successor government. Under international law, the current Chinese government, led by the Chinese Communist Party, is responsible for the repayment of the defaulted bonds.

A group of American citizens, known as the American Bondholders Foundation (ABF), holds a significant amount of these defaulted bonds. The ABF represents around 20,000 bondholders, with the bonds valued at over $1 trillion. In 1987, the U.K. negotiated a settlement agreement with China, requiring the repayment of defaulted Chinese sovereign debt held by British subjects in exchange for access to U.K. capital markets. However, the U.S. has not taken a similar stance, allowing China access to U.S. capital markets while rejecting its debt obligations to American bondholders.

The author argues that the Biden administration and Congress have an opportunity to enforce the international rule that governments must honor their debts. They propose two potential actions: acquiring the Chinese bonds held by the ABF and using them to offset U.S. Treasurys owned by China, or passing legislation that requires China to abide by international norms and rules of finance, trade, and commerce. Failure to meet these obligations would result in China and its state-controlled entities being barred from U.S. dollar-denominated bond markets and exchanges.

According to the author, addressing China's default on its sovereign debt is not only fair to the bondholders but also beneficial to the U.S. taxpayer. There has been bipartisan support in Congress over the past two decades for addressing this issue, but previous administrations have chosen to ignore it in the hopes that China would eventually embrace Western norms and values. However, given the deteriorating relationship with China, now is the time for action.


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