The CCP is ready to look back decades for taxes owed to it — but not for the sovereign bond obligations it owes to thousands of American families
How far back can one go to enforce a financial obligation?
China’s central government has given us one answer. According to recentreporting from the Financial Times, Beijing’s tax authorities are reaching back as far as 27 years — to 1999 — in pursuit of capital gains and income taxes that may be owed by wealthy Chinese citizens. In the CCP’s search for revenue and liquidity, no obligation to the state is apparently too old to collect.
Elsewhere, China’s government insists on precisely the opposite principle: that no one should look back to financial obligations it doesn’t feel like paying. That is the case with the Chinese sovereign bonds issued by the predecessor government of China — long-term, gold-denominated bonds, secured by Chinese tax revenues, sold to investors around the world to build railways, ports, and other infrastructure, much of it still in use in China to this day. Chinadefaulted on these bonds in 1938, and the People’s Republic — recognized internationally as the successor government of China — has refused to honor them ever since.
Refused, that is, with one telling exception.
The 1987 Settlement: China Pays When It Wants Something
As recently as 1987, the CCP recognized the validity of these gold-backed sovereign bond obligations — at least those held by citizens of the United Kingdom. That’s going back decades, and not so different from the massive “look back” China is now pursuing in its search for unpaid taxes.
In the United Kingdom settlement, the CCP agreed to pay a negotiated amount to British holders of these same bonds. The settlement was concluded in the context of the negotiations surrounding the handover of Hong Kong — and, notably, at a time whenPrime Minister Margaret Thatcher’s government was denying Chinese issuers access to London’s capital markets until the bond question was resolved. China was willing to acknowledge its sovereign debt obligations when there was something it wanted. It got Hong Kong. It got the City of London. British bondholders got paid.
American holders of the identical bonds got nothing — and have received nothing to this day.
“So, we have a case of selective default here, with Chinese rulers ready to recognize these bond obligations when it suits their purposes, and otherwise not,” said CPA Chairman Zach Mottl.
A Violation of Settled International Law
China’s refusal to recognize the bonds is also a violation of the longstanding “successor government doctrine” governing the continuity of the debt obligations of sovereign governments. The doctrine is not an obscure technicality — it is the foundation on which the entire sovereign debt market rests, and it is so widely honored that even revolutionary governments have complied with it. In 2002, Russia was still paying on obligations from the time of the Czars. Germany continued servicing debt from the Weimar Republic — the reparations-era obligations of a government that ceased to exist —into the 21st century.
“This Doctrine — and the sound principles underpinning it — must be complied with,” said Roger W. Robinson, former Senior Director of International Economic Affairs at the Reagan National Security Council and Senior Advisor to CPA’s China Project. “We can only imagine the chaos that would ensue in global markets if countries concluded that they could, in effect, walk away from their sovereign debt obligations every time a government changed more radically, as happened in Iraq with the fall of Saddam Hussein. In that case, the Chinese famously demanded repayment of 100 cents to the dollar on the billions owed them for their supplies of weaponry and other forms of life-support to this brutal regime.”
The Iraq episode completes the picture of Beijing’s one-way rules: when China is the creditor, sovereign obligations are sacred and survive any change of regime. When China is the debtor, they are a historical curiosity.
The Scale of the Debt — and Who Holds It
The defaulted bonds are not held by hedge funds or foreign governments. They are held by an estimated20,000 American families, many of whom inherited them across generations, represented by the American Bondholders Foundation as trustee. With accrued interest and penalties, analysts have valued the obligations atmore than $1 trillion — a figure that stands in stark relief against the roughly $750 billion in U.S. Treasury debt on which American taxpayers dutifully pay interest to the CCP every year.
In the end, it’s a matter of fair play and adherence to accepted norms. Does China play by the same rules as every other country, or insist on preferential treatment? Clearly, it’s the latter. The present administration — from the President on down — is aware of this selective Chinese default, and offers the best chance to date for American bondholders to be, at long last, made whole, even on a discounted basis.
America Holds a Bigger Card Than Thatcher Ever Did
There is considerable evidence that what Beijing desperately wanted from the UK in 1987 was access to its capital markets, which the U.K. was denying before the agreement was reached. The irony is that the United States today holds a card far larger than any ever held by the U.K.: access to the U.S. capital markets, nearly as large as the rest of the world’s combined.
CPA has extensively documented how deeply China depends on that access. A series of landmark CPA reports —on Vanguard and FTSE Russell,on BlackRock and MSCI, andon Wall Street’s joint ventures with CCP-controlled banks — has shown how U.S. capital markets funnel billions of dollars in American investor capital to CCP- and PLA-linked companies, with roughly 5,000 Chinese corporate securities trading in U.S. markets without complying with federal securities laws. Beijing’s access to American capital is not a favor owed to China. It is leverage — and it has never been used on behalf of the Americans China has stiffed for nearly ninety years.
“Thousands of Americans are holding these bonds, which with accrued interest and penalties have been valued as high as $1 trillion or more,” said CPA President Jon Toomey. “The least we can do on their behalf is let Chinese leaders know that continued access to our capital markets is dependent upon a negotiated settlement of these legitimate sovereign bond obligations.”
A government that will chase its own citizens for taxes incurred in 1999 has forfeited any argument that 1938 is too long ago to matter. The debt is valid. The doctrine is settled. The precedent — set by China itself in 1987 — is established. All that has been missing is an American government willing to use the leverage it holds. That should now change.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
Beijing Wants Its Money From 1997. American Bondholders Have Been Waiting Since 1938.
The CCP is ready to look back decades for taxes owed to it — but not for the sovereign bond obligations it owes to thousands of American families
How far back can one go to enforce a financial obligation?
China’s central government has given us one answer. According to recent reporting from the Financial Times, Beijing’s tax authorities are reaching back as far as 27 years — to 1999 — in pursuit of capital gains and income taxes that may be owed by wealthy Chinese citizens. In the CCP’s search for revenue and liquidity, no obligation to the state is apparently too old to collect.
Elsewhere, China’s government insists on precisely the opposite principle: that no one should look back to financial obligations it doesn’t feel like paying. That is the case with the Chinese sovereign bonds issued by the predecessor government of China — long-term, gold-denominated bonds, secured by Chinese tax revenues, sold to investors around the world to build railways, ports, and other infrastructure, much of it still in use in China to this day. China defaulted on these bonds in 1938, and the People’s Republic — recognized internationally as the successor government of China — has refused to honor them ever since.
Refused, that is, with one telling exception.
The 1987 Settlement: China Pays When It Wants Something
As recently as 1987, the CCP recognized the validity of these gold-backed sovereign bond obligations — at least those held by citizens of the United Kingdom. That’s going back decades, and not so different from the massive “look back” China is now pursuing in its search for unpaid taxes.
In the United Kingdom settlement, the CCP agreed to pay a negotiated amount to British holders of these same bonds. The settlement was concluded in the context of the negotiations surrounding the handover of Hong Kong — and, notably, at a time when Prime Minister Margaret Thatcher’s government was denying Chinese issuers access to London’s capital markets until the bond question was resolved. China was willing to acknowledge its sovereign debt obligations when there was something it wanted. It got Hong Kong. It got the City of London. British bondholders got paid.
American holders of the identical bonds got nothing — and have received nothing to this day.
“So, we have a case of selective default here, with Chinese rulers ready to recognize these bond obligations when it suits their purposes, and otherwise not,” said CPA Chairman Zach Mottl.
A Violation of Settled International Law
China’s refusal to recognize the bonds is also a violation of the longstanding “successor government doctrine” governing the continuity of the debt obligations of sovereign governments. The doctrine is not an obscure technicality — it is the foundation on which the entire sovereign debt market rests, and it is so widely honored that even revolutionary governments have complied with it. In 2002, Russia was still paying on obligations from the time of the Czars. Germany continued servicing debt from the Weimar Republic — the reparations-era obligations of a government that ceased to exist — into the 21st century.
“This Doctrine — and the sound principles underpinning it — must be complied with,” said Roger W. Robinson, former Senior Director of International Economic Affairs at the Reagan National Security Council and Senior Advisor to CPA’s China Project. “We can only imagine the chaos that would ensue in global markets if countries concluded that they could, in effect, walk away from their sovereign debt obligations every time a government changed more radically, as happened in Iraq with the fall of Saddam Hussein. In that case, the Chinese famously demanded repayment of 100 cents to the dollar on the billions owed them for their supplies of weaponry and other forms of life-support to this brutal regime.”
The Iraq episode completes the picture of Beijing’s one-way rules: when China is the creditor, sovereign obligations are sacred and survive any change of regime. When China is the debtor, they are a historical curiosity.
The Scale of the Debt — and Who Holds It
The defaulted bonds are not held by hedge funds or foreign governments. They are held by an estimated 20,000 American families, many of whom inherited them across generations, represented by the American Bondholders Foundation as trustee. With accrued interest and penalties, analysts have valued the obligations at more than $1 trillion — a figure that stands in stark relief against the roughly $750 billion in U.S. Treasury debt on which American taxpayers dutifully pay interest to the CCP every year.
The issue has drawn growing attention in Washington. Members of Congress have introduced legislation to condition China’s access to U.S. capital markets on settlement of the defaulted debt, and CPA’s Robinson has raised the defaulted gold-backed bonds directly with Congress, noting that standard estimates of U.S. investor exposure to Chinese debt securities do not even account for this potentially enormous claim under the successor government doctrine.
In the end, it’s a matter of fair play and adherence to accepted norms. Does China play by the same rules as every other country, or insist on preferential treatment? Clearly, it’s the latter. The present administration — from the President on down — is aware of this selective Chinese default, and offers the best chance to date for American bondholders to be, at long last, made whole, even on a discounted basis.
America Holds a Bigger Card Than Thatcher Ever Did
There is considerable evidence that what Beijing desperately wanted from the UK in 1987 was access to its capital markets, which the U.K. was denying before the agreement was reached. The irony is that the United States today holds a card far larger than any ever held by the U.K.: access to the U.S. capital markets, nearly as large as the rest of the world’s combined.
CPA has extensively documented how deeply China depends on that access. A series of landmark CPA reports — on Vanguard and FTSE Russell, on BlackRock and MSCI, and on Wall Street’s joint ventures with CCP-controlled banks — has shown how U.S. capital markets funnel billions of dollars in American investor capital to CCP- and PLA-linked companies, with roughly 5,000 Chinese corporate securities trading in U.S. markets without complying with federal securities laws. Beijing’s access to American capital is not a favor owed to China. It is leverage — and it has never been used on behalf of the Americans China has stiffed for nearly ninety years.
“Thousands of Americans are holding these bonds, which with accrued interest and penalties have been valued as high as $1 trillion or more,” said CPA President Jon Toomey. “The least we can do on their behalf is let Chinese leaders know that continued access to our capital markets is dependent upon a negotiated settlement of these legitimate sovereign bond obligations.”
A government that will chase its own citizens for taxes incurred in 1999 has forfeited any argument that 1938 is too long ago to matter. The debt is valid. The doctrine is settled. The precedent — set by China itself in 1987 — is established. All that has been missing is an American government willing to use the leverage it holds. That should now change.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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