Old Chinese bonds are now in play

Former US national security adviser Zbigniew Brzezinski wrote that Americans seeking to preserve the country’s global primacy must, as in chess, think of several steps in advance, by anticipating possible counter-movements.

His advice comes to mind as tensions between the United States and China over data security, trade and intellectual property theft escalate. Both sides openly demonstrate their economic and military might. But geopolitical changes rarely depend solely on visible leverage, and America can still hold a trump card.

What if President Donald Trump pushes his rhetoric on “making China pay” for Covid-19 to its logical conclusion? Major Republicans love Senator Lindsey Graham say the United States should consider canceling the over $ 1 billion bonds that China holds in the US Treasury to seek redress.

The obvious criticism is that America’s credit rating would collapse if it repudiated some of its debts. The United States is dependent on external financing and cannot afford to alienate bond buyers. Even if other investors might be persuaded that a default by a single Chinese state was justifiable, who could shoulder the burden of financing?

Yet none of this makes the “make China pay” policy dead in the water. In chess, a new context allows previously redundant pieces. And such a room could turn out to be a Over $ 1 million (when compound interest is accounted for) pre-People’s Republic of China debt that has not yet been canceled, ranging from the 1911 Hukuang Railroad Sinking Fund gold loan and the 1911 Hukuang Railroad Sinking Fund loan reorganization gold from 1913, to the so-called Liberty bonds of 1937.

Long forgotten, these bearer bonds – denominated in pounds sterling, Swiss francs, Russian rubles, German marks or US dollars – exist mainly in private collections or in the attics of individuals. The most relevant have been issued by either the former Republic of China or the former Chinese Imperial State to raise funds for major development and infrastructure projects. Some were backed by income from Chinese natural assets like salt resources.

When the People’s Republic of China was founded in 1949, its rulers broke with the debt-holding tradition of previous regimes. But they never officially derecognized the debt. Instead, the bonds defaulted, mainly taking on ancient value.

Mitu Gulati, a law professor at Duke University who has studied bonds, believes a legal argument could be made to revive some of the claims. Some of the old bonds include legal clauses that suggest that the new Chinese debt cannot be issued until the old debt has been processed.

The 1912 and 1913 issues continued to trade speculatively on the London Stock Exchange until 1987, when some investor bets seemed to pay off. Margaret Thatcher’s UK government managed to negotiate a final settlement that raised £ 20million for UK bondholders at a time when China wanted to enter London capital markets and there was active negotiations on Hong Kong’s return to China.

Professor Gulati argues that in the right diplomatic context, US holders of old Chinese debts could argue for a debt swap or “set-off” against existing US Treasury debt. Tennessee-based Jonna Bianco heads the American Bondholders Foundation, which says it represents $ 1.6 billion in claims. Trump supporter Ms Bianco says recent events have strengthened her hand. The legal merits of the claims are clearly questionable, but speculators are interested. The value of historical bonds traded on eBay and at specialist dealers has increased. George LaBarre, a specialist in vintage financial paper, claims that the price of the 1911 Hukuang bond has dropped from $ 75-100 to around $ 450.

Are investors betting that Mr. Trump will really use bonds to pressure the Chinese government? Perhaps. But they can also hope that his rhetoric alone will be enough to increase their value. Stranger things have happened.

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