Frequently Asked Questions

1. China owes over $1 Trillion in sovereign debt. How did this come to be?
Back in 1911, the Republic of China government or the ROC, came to power ending thousands of years of Imperial Chinese rule. Starting in 1912 and for several years up to 1940, the new government issued sovereign bearer bonds to the world in order to raise money for construction and development of infrastructure throughout the country. Many countries, banks, companies, governments and private citizens purchased these bonds, which were underwritten by investment banks from many of the industrialized countries including the predecessors to today’s major investment banks such as J.P. Morgan, Deutsche Bank, Lehman Brothers, HSBC and Citibank. In 1938, China defaulted on these bonds leaving bondholders unpaid.

Governments around the world, including the United States issue sovereign debt in the form of bonds, both short and long term bonds/debt. These bonds are issued for various terms such as 30, 40, 50, 60 year terms, and even today, up to 100-year term bonds. Because China has chosen to “selectively default” and not pay on these bonds, cumulative interest, default interest and penalties have continued to accrue for decades.
2. Why is China still responsible for defaulted sovereign bonds?
After China defaulted on the bonds in 1938, Communists led by Mao Zedong took over China forming the People’s Republic of China or the PRC in 1949. Members of the Republic of China (ROC) fled to Taiwan. The PRC took over mainland China, continued to collect all taxes, took over all of the development and infrastructure of the country that was underwritten by these bonds and became the “Successor Government”. To this day, China demands a “One China Policy” that recognizes the PRC as the sole legitimate government of all of China. It is well established under international law, that the successor government is responsible for the payment of sovereign debt obligations of a predecessor government.
3. Why are the bonds still valid?   
It is a fundamental principal of international law, which has been reaffirmed countless times by governments, legislative and judicial bodies around the world, that a mere change in the governing body of a country does not affect that country’s obligation to repay its sovereign debts. If such a change in government allowed a country to renege on its payment obligations, the entire system of international trade and finance would not work as no citizens, institutions, and governments would rely on the credit worthiness and credibility of the countries when they issued sovereign bonds for their respective financing. A prime example is every four years the United States holds a Presidential election.  Even with the change of an administration, the U.S. honors its obligations and pays interest and principal on the U.S. Treasuries it offers worldwide.
4. Why is China’s payment to British bondholders significant?   
In 1987, the PRC paid the United Kingdom claims of “British nationals” against the PRC for debts incurred prior to the PRC’s formation in 1949, including the very same pre-1949 sovereign bonds at issue. When China needed to raise more money in British capital markets, Prime Minister Margaret Thatcher, the “Iron lady”, made it clear that China must first pay on its defaulted sovereign bonds.  This settlement is very significant because by making payment on these same bonds to the British people, yet refusing to pay America, this places China in Selective Default.  Placing the PRC in Selective Default adversely affects its credit rating and requires that China acknowledge this debt to America as part of the full disclosure requirements in order to raise capital in U.S. markets.  So, the PRC and its State Owned Enterprises (SOE’s), which are corporate entities owned and controlled by the dictatorship of the Chinese Communist Party (CCP) should not have access to U.S. capital markets and take more money from America until they pay on their defaulted sovereign debt first.
American Bondholders Foundation, LLC
2840 Glasscock Road, Lewisburg, Tennessee 37091
(931) 359-8781 office | (931) 359-9689 fax