China is collecting on old debts but won't pay its own

By Zach Mottl

China's leaders are working to recoup hundreds of billions of dollars worth of unpaid taxes. At the same time, the country is defaulting on a significant obligation.

Beijing still owes more than $1 trillion to U.S. investors who have been waiting decades for repayment.

China's leaders are in the midst of a campaign to recoup hundreds of billions of dollars worth of unpaid capital-gains and income taxes owed by wealthy Chinese citizens. But even as the Chinese Communist Party is going as far as scrutinizing overseas investments to collect money the country's leadership says it's owed, it is defaulting on another significant obligation.

Beijing still owes more than $1 trillion to U.S. investors who have been waiting decades for repayment. But the CCP continues to conveniently ignore this massive obligation. Now, however, is a good moment to press the claim - Washington and Beijing are currently renegotiating the terms of their trade and financial relationship ahead of next month's meeting between U.S. President Donald Trump and Chinese leader Xi Jinping.

At issue are the sovereign bonds sold to investors worldwide by the Republic of China prior to the government of Mao Zedong, who led the country from 1949 until his death in 1976. These long-term, gold-denominated bonds - which were secured by Chinese tax revenues - helped to pay for China's large-scale system of railways, ports and other infrastructure. However, China defaulted on these bonds in 1938. Since then, the country has refused to honor them.

Significantly, the only time Beijing agreed to honor part of this debt was in 1987, when it recognized the validity of its gold-backed sovereign bonds - but only for citizens of the United Kingdom.

In the U.K. settlement, China agreed to pay a negotiated amount to British bondholders. The settlement was concluded in the context of negotiations for the transfer of Hong Kong out of British control. At the time, the Thatcher government was denying Chinese access to London's capital markets until the bond question was resolved. Thatcher's tough line worked - Beijing acknowledged its debt obligations and British bondholders got paid.

Unfortunately, American bondholders have received nothing to this day. An estimated 20,000 American families still hold unpaid Chinese bonds. According to the American Bondholders Foundation, this outstanding debt now exceeds $1 trillion, thanks to accrued interest and penalties.

Something else to consider: That $1 trillion in unpaid obligations exceeds the $750 billion in U.S. Treasury debt on which America's taxpayers dutifully pay interest to China each year.

This is a perfect example of selective default. Beijing will happily recognize bond obligations - but only when doing so suits its purposes.

China's refusal to recognize the bonds is a violation of the longstanding successor government doctrine, a provision of international law that requires a country to honor its debt obligations regardless of whether the government changes hands. It's the foundation for the entire sovereign debt market - and is so widely honored that in 2002, Russia was still paying obligations from the time of the czars. Germany continued paying debt from the Weimar Republic into the 21st century.

Washington is finally paying attention, though. Members of Congress have introduced legislation to condition China's access to U.S. capital markets on settlement of the defaulted debt.

Because China values its access to America's capital markets, now is the time to seek recompense for American bondholders. The U.S. has leverage - its capital markets are nearly as large as the rest of the world's combined. And Beijing urgently needs continued access to America's financial institutions.

Right now, America's capital markets are funneling billions of investment dollars into companies linked to both the CCP and China's military. And roughly 5,000 Chinese corporate securities currently trade in U.S. markets, even though they don't comply with federal securities laws.

This gives Washington bargaining power. It's time to tell Beijing that continued access to America's financial markets should be conditioned on a negotiated settlement for its longstanding sovereign bond obligations.

In the end, this is a matter of fair play and adherence to accepted norms. Will China play by the same rules as every other country, or will it insist on preferential treatment?

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's missing is a willingness for Washington to use the leverage it holds.

Zach Mottl is chair of the Coalition for a Prosperous America.

-Zach Mottl

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08-26-26 1042ET