China is in default on a trillion dollars in debt to US bondholders. Will the US force repayment? (2024)

Every country should pay its sovereign debt. Default, we are told, is not an option. But has anyone told China?

The United States pays interest on approximately $850 billion in debt held by the People’s Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.

Successive U.S. administrations have chosen to sidestep this fact, allowing business and trade with China to proceed as normal. Now that the relationship with China has soured and the People’s Republic of China has become the greatest adversarial threat to the U.S. and Western security, policymakers should revisit this appalling failure of justice.


Some history is in order. Before 1949, the government of the Republic of China (ROC) issued a large volume of long-term sovereign gold-denominated bonds, secured by Chinese tax revenues, to private investors and governments for the construction of infrastructure and financing of governmental activities. Put simply, the China we know today would not have been possible absent these bond offerings.

In 1938, during its conflict with Japan, the ROC defaulted on its sovereign debt. After the military victory of the communists, the ROC government fled to Taiwan. The People’s Republic of China was eventually recognized internationally as the successor government of China. Under well-established international law, the “successor government” doctrine holds that the current government of China, led by the Chinese Communist Party, is responsible for repayment of the defaulted bonds.

A private group of American citizens holds a large quantity of these gold-denominated bonds. This citizen-led group, the American Bondholders Foundation (ABF), serves as trustee with power of attorney for some 20,000 bondholders, whose bonds are valued at well more than $1 trillion.

Then-U.K. Prime Minister Margaret Thatcher’s tough negotiation stance on the return of Hong Kong to China led to a British settlement agreement on these same Chinese bonds in 1987. Thatcher said that for China to have access to U.K. capital markets, it had to honor the defaulted Chinese sovereign debt held by British subjects. Faced with that stark choice, China agreed.

Unfortunately, the U.S. failed to take such a common-sense stance. To this day, China has had access to U.S. capital markets while openly rejecting its sovereign debt obligations to American bondholders.

Lest anyone wonder about the age of these bonds, it is irrelevant. What matters is that this is a sovereign obligation. As recently as 2010, the German government made its last payment for reparations from World War I. In 2015 Great Britain made payments on bonds issuances that dated from the 18thcentury.

The Biden administration and the U.S. Congress have a unique opportunity to enforce the well-established international rule that governments must honor their debts. Like the U.K. did in 1987, the U.S. must view the repayment of China’s sovereign debt as essential to its national security interests. In doing so, the U.S. government should undertake one or both of two actions currently being discussed by members of Congress.

The first would be to acquire the Chinese bonds held by the ABF and utilize them to offset (partially or in whole) the $850 billion-plus of U.S. Treasurys owned by China (reducing up to $95 million indailyinterest paid to China). This would lower the national debt and put the U.S. in a better financial position globally.

The second would be to pass legislation that requires China to abide by international norms and rules of finance, trade and commerce. This would include abiding by the transparency rules of capital markets and exchanges and ending its practices of exclusionary settlement, discriminatory payments, selective default, and rejection of the successor government doctrine of settled international law. If China fails to meet those obligations, it would be barred, together with its state-controlled entities, from access to all U.S. dollar-denominated bond markets and exchanges.

This, again, is just common sense and would be the very thing the Chinese government would do if the situation were reversed.

Over the last two decades, there has been recurrent bipartisan support in Congress for bondholders to address China’s default with several congressional resolutions. Despite this, successive U.S. administrations have been silent on this issue, choosing to kick this can down the road, assuming that China would eventually liberalize and embrace Western norms and values.

This failure to act needs to end now.

Given that relations with China have deteriorated and there is bipartisan agreement on the threat from China, this matter can finally be acted upon by both Congress and the Biden administration. Getting settlement on this defaulted debt is not only right and just for the bondholders but, if done correctly, could also be a huge win for the U.S. taxpayer.

AndrewHaleis the Jay Van Andel Senior Policy Analyst in Trade Policy at The Heritage Foundation.

Copyright 2024 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

China is in default on a trillion dollars in debt to US bondholders. Will the US force repayment? (2024)


What would happen if China collected on U.S. debt? ›

If China called in all of its U.S. holdings, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive.

What happens if China dumps US bonds? ›

If China (or any other nation that has a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result.

How much does China owe US bond holders? ›

The United States pays interest on approximately $850 billion in debt held by the People's Republic of China.

Who owns most of China's debt? ›

[2] A report by the credit rating agency S&P Global in 2022 estimated that 79 per cent of corporate debt in China was owed by SOEs (the IMF does not break down the proportion of debt owed by SOEs).

Is China's debt worse than the US? ›

China's debt overhang far exceeds the burdens facing the United States. As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.

How much land does China own in the United States? ›

According to a 2021 report by the Department of Agriculture, China owns 384,000 acres of American agricultural land; ownership which jumped by 30% from 2019 to 2020.

What countries are dumping US bonds? ›

As the Chinese accumulate more and more gold, they're dumping U.S. Treasuries.

Is China dumping US Treasury bills? ›

Beijing, vigilant in the protection of its overseas assets, has slashed its holdings of US Treasury bills by 25 per cent since early 2021 to the tune of US$280 billion. Its position hit a 14-year low of US$769.6 billion in October 2023, a decline commonly attributed to a conscious effort to diversify its holdings.

Who is dumping US bonds? ›

China sells the most US assets in 4 years, dumping $21 billion of US stock and Treasury bonds. Chinese investors sold $21.2 billion in US equities and Treasuries, the US Treasury said Wednesday.

How much money does the US owe China live? ›

How did USA owe China so much money? The U.S. debt to China is approximately $1.059 trillion. That's 27.8 percent of the $3.8 trillion in treasury bills, notes, and bonds held by foreign countries. The rest of the $19.9 trillion national debt is owned by either the American people or by the U.S. government itself.

Who owns over 70% of the U.S. debt? ›

Of the $33T of debt, roughly 78% is owned by the public (70% US vs 30% International). The major US public owners include the FED ($6T, but they are no longer buyers), mutual funds, banks, states, pension funds and insurance companies.

How much money does China owe the United States? ›

Nearly half of all US foreign-owned debt comes from five countries. All values are adjusted to 2023 dollars. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

Why is China selling U.S. debt? ›

Selling Treasurys is a fast way to whip up U.S. dollars, and China will sometimes use extra dollars to go out on the global market and buy up their own currency. That artificially pumps up its value. It's like planting someone at an auction to drive up your prices.

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