China’s Obligation


The People’s Republic of China (PRC) government continues to hold a double standard in its dealings with the U.S. It claims to be the sole government of all of China, including Taiwan, which is governed by the Republic of China (ROC). But at the same time, China refuses to honor its obligations to pay on the defaulted sovereign bonds citing that they were issued by the ROC. They can’t have it both ways.


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.* Back in 1911, the Republic of China government or the ROC, came to power ending thousands of years of Imperial Chinese rule. In 1912, the new government issued sovereign bearer bonds to the world in order to raise money for construction of railways throughout the country. These sovereign bonds were tied to the gold standard and included explicit bolded language on their face, “binding engagement upon the Government of the Republic of China and its Successors.” In 1938, China defaulted on these bonds leaving bondholders unpaid. Then, in 1949, Communists led by Mao Zedong took over China forming the People’s Republic of China or the PRC. Members of the Republic of China fled to Taiwan, which to this day, remains the official government over the island. Thus, the PRC became the successor government controlling mainland China.


The U.S. government issues sovereign bonds in the form of U.S. Treasuries and has never defaulted on these bonds and pays interest on them. America continues to pay China billions of dollars in interest on U.S.Treasuries that China holds. This allows China to pose as a legitimate lender nation, when in fact it acts as a deadbeat on its own debt. By giving China a free pass on its defaulted sovereign debt, the U.S. and other countries effectively subsidize China’s access to capital by lowering its borrowing costs.

So, while it enjoys the benefits of membership in international organizations and of international agreements and touts that it is a free market leader in the international trade and financial community, China has a long history of not honoring its international obligations and not playing by the rules of the international community. China professes to be a responsible global power yet it continues to blatantly disregard the rule of law and its international obligations as it sees fit. China has already issued new debt to Americans and China intends to issue billions more sovereign debt! The time has come for China to play by the rules and pay its defaulted sovereign debt.
* See Restatement (Third) of the Foreign Relations Law of the United States, 712(2) (1986)
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