Why Does China Owe Americans $1 Trillion?

An Interview with Jonna Bianco of the American Bondholder Foundation
by Jerry Gordon (June 2012)

Richard Parker, a frequent contributor to the McClatchey –Tribune group published the first national media revelations of the pre-1949 defaulted Chinese debt of nearly $1 trillion owed to more than 20,000 Americans. Debt, that if resolved, might result in a boon to the US economy and lower our national debt at virtually no cost to American taxpayers. In “China’s Secret? It owes Americans nearly $1 trillion,” Parker notes in his opening stanza how this boon to the US economy could be implemented with a stroke of President Obama’s pen:

China has a secret: It owes American investors hundreds of billions of dollars.

The Chinese government doesn't like to talk about it and the U.S. government doesn't want to raise it. But decades ago, Beijing defaulted on debt owed to Americans, as well as investors and governments around the world. In one case, it was paid. In the rest it was not. More than 20,000 American investors own this debt. The U.S. government may also own Chinese war debt, unpaid since World War II.

With the simple stroke of an executive proclamation, President Barack Obama can begin the process of addressing this issue. A 1930s-era law has established a quasi-public agency within the Securities and Exchange Commission, known as the Corporation of Foreign Securities Holders, which can arbitrate this dispute, much as a predecessor agency did for decades. China can both afford and benefit from this solution; it will afford goodwill at a time when relations between the world's two superpowers are strained.

We have followed the debate on this issue raised by the American Bondholder Foundation and championed by the group’s head, Jonna Bianco, a Tennessee grandmother and cattle rancher. Watch Ms. Bianco in this Fox News Special Report segment with Peter Barnes which aired on June 15, 2012.

We posted on the history and prospects of selective default of pre-1949 Chinese debt issued by the Republic of China and the decades of litigation and lost opportunities to resolve it. The current Chinese government feels justified in repudiating the debt because the bonds were issued by Chiang Kai-Shek's Nationalist Party, the Kuomintang (KMT). In “How to Reduce the Federal Deficit by $750 Billion.”  We noted:

One potential means of redressing the budgetary imbalance and preserving some of the valued entitlement benefit programs might lie in negotiations between our Government and the Peoples Republic of China (PRC) over repayment of sovereign indebtedness issued prior to the 1949 takeover by the PRC. This despite the fact that the PRC has subsequently issued sovereign debt in the world’s capital markets including thousands of bonds to American investors. Currently, China owes over $750 billion in indebtedness to American bondholders holding full faith and credit sovereign bonds sold them by the Republic of China (ROC). The PRC refused to honor financial obligations under recognized international and commercial law. Americans holding defaulted full faith and credit obligations of the Chinese Government are therefore dependent upon the Executive branch to negotiate a resolution of claims. In 1979 the PRC settled claims of Americans whose property was confiscated or nationalized by the PRC. The Chinese Government has refused to recognize the claims of American bondholders who hold Chinese debt issued prior to 1950. This despite the fact that the PRC reached a settlement with the United Kingdom in 1987 on behalf of British holders of similar defaulted Chinese bonds.

  [. . ]

The American Bondholders Foundation, LLC (hereafter “ABF”) which represents thousands of Americans in more than 43 states holding defaulted pre- 1949 sovereign Chinese debt believes the impact would be significant. If China paid, for example, just one-third of the face amount of defaulted sovereign debt of the prior ROC regime, that would amount to an infusion of more than $250 billion into the US economy of which the US ABF pool would receive $100 billion. Another $100 billion would be distributed to states at approximately $2 billion each, while $50 billion would be used to extinguish the indebtedness of non-US holders of such Chinese debt. There would be several billions paid in both federal capital gains and state taxes by American holders of these Chinese bonds. Further, fully 25 percent of the amount collected by the ABF US pool would be contributed to ABF charities, a 501 c3 organization devoted to humanitarian projects across America. All this without additional federal government stimulus programs or raising taxes, while alleviating both federal and state debt.

The Parker article addressed the means available to the Obama Administration to resolve the defaulted pre-1949 Chinese debt and boost the economy:

The U.S. government has a legal obligation to its citizens. The 1933 Securities Act established both the Foreign Bondholders Protective Council, under State and Treasury, and the Corporation of Foreign Security Holders, under the SEC, to get foreign governments to address debts owed to private U.S. investors. Housed in a Virginia suburb, the council in 47 instances settled the debts of foreign governments, including communist ones, to U.S. citizens. In 1975, the Polish government paid U.S. investors one-third the face value, or $8.5 million, of nine different series of bonds, all inherited from previous governments.

Indeed, President George W. Bush's counsel directed the bondholders to the council in 2001 but the council did nothing, most likely to keep from rocking the bilateral U.S.-China boat. Now, the council is shuttering its doors, as it has completed dozens of cases and no administration wanted to refer the Chinese case for fear of upsetting Beijing again. However, the Corporation of Foreign Security Holders is still on the books and represents the only chance for U.S. investors to be paid.

All that has to happen is that President Obama issue a proclamation to stand up the corporation, and a staff, at the SEC. The bondholders would bring their bonds in for examination and verification of the certificates and serial numbers. Then the corporation could get about settling the issue through payment, reissue of bonds, restructuring or even settling the debt. Many of these people are not wealthy investors but just everyday citizens. Bianco herself is a Tennessee cattle farmer.

But it appears our Treasury Department is not keen on this issue given overarching goals of opening up the vast Chinese market to US financial service concerns in exchange for entry of Chinese financial investment in US institutions. Parker refers to a letter sent by Republican US House member Gary Miller to the Treasury. Congressman Miller received a response from Undersecretary of The Treasury for International Affairs, Dr. Lael Brainard dated May 11th. Her response to Congressman Miller focused largely on meetings held earlier this month in Beijing endeavoring to secure commitments from the PRC to open up their financial sector to US banks and financial services firms.

Brainard attached a memo to this letter to Congressman Miller illustrative of how the Treasury views the pre-1949 Chinese debt default issue as a dead issue. The memo indicated that the Treasury Department doesn’t hold any pre-1949 Chinese bonds in its foreign exchange reserves, nor, to its knowledge, does any other US government agency hold these bonds. Brainard’s memo indicates that it has no information on how many American citizens hold pre-1949 Chinese bonds. It categorically states that the US government has “no legal obligation to help bondholders seek and obtain settlement of defaulted bonds.” The memo goes on to note:

In 1970, the Foreign Claims Settlement Commission (FCSC), a quasi-judicial, independent agency within the Justice Department, considered a claim on defaulted pre-1949 Chinese Bonds under the International Claims Settlement Act of 1949. In FCSC Decision No. CN-47 dated March 18, 1970, the FCSC concluded that the bonds at issue had been in default since 1939 and the claims based on those bonds did not come under the purview of the Act, and accordingly denied the Claim.

Moreover, when queried by Congressman Miller about “whether the PRC has any obligation to satisfy these bonds, in whole or in part,” the Undersecretary’s answer was that “The Treasury Department has no view as to whether the current Chinese Government has any obligation to satisfy pre-1949 bonds.”

With the Congress about to take up the nettlesome issue of another increase in the national debt ceiling, and concerns about stimulating job growth in a slow growth economy, it appears the matter of selective default of pre-1949 Chinese bonds will not be taken up by Treasury, or any other agency of the Obama Administration. Dr. Brainard’s perfunctory reply to Congressman Miller contrasts sharply with her effusive expressions of hope that China will lift barriers to entry by major banks and Wall Street financial concerns to exploit huge opportunities in the Chinese economy. This effectively gives short shrift to main street citizens seeking to have their holdings of pre-1949 Chinese bonds repaid by the PRC. The PRC has ironically gone to great lengths to lower US public debt ratings. A swap of these pre-1949 Chinese bonds for some of the trillions of US debt held by Beijing in any selective default scheme would be a win-win solution. However, it would appear that reviving the matter with its significant economic benefits to Main Street is not in the best interests of the Obama Administration. After all, the President’s 2008 election campaign raised more than $42 million from those banks and investment firms salivating at the golden opportunity of entering the vast Chinese marketplace.

Against this background, we interviewed Ms. Bianco on what the PRC owes Americans nearly $1 trillion in debt.

Jerry Gordon:  Thank you Jonna Bianco for consenting to this timely interview.

Jonna Bianco:  Thank you for inviting me.

Gordon:  Does the People's Republic of China owe Americans more than one trillion in unpaid Republic of China (ROC) bonds?

Bianco:  Yes they do. 

Gordon:  What would be the impact on America if these defaulted Chinese bonds were selectively repaid at discount?

Bianco:  It would have a huge economic impact. It would be a true economic stimulus of money that's owed, not money coming from taxpayers or the Federal Government under bailouts. It would not only benefit the individual bondholders themselves but their communities. In addition to that the tax revenue going to States and the Federal government would be significant. In addition, 25% of everything collected in this settlement would be allocated to benefit humanitarian programs across the country in every single state, from hospice programs to volunteer fire department equipment and products that they need in order to be up to safety standards, crisis centers, etc. There would be a huge benefit to the American people all across the board.

Gordon:  Why has this Chinese bond default issue only recently come to public attention?

Bianco:  We have been working at this for twelve years. The American Bondholders Foundation has engaged Members of Congress, the Administration, State Department, Treasury, and the National Security Council. We have continued to raise the level of awareness of this issue. Friends in the media that we've spoke to like the New English Review have brought it to the attention of the American public. Richard Parker of Parker Media and other people have taken the time to actually investigate this issue. They have researched it and realized the legitimacy and credibility of this debt. That began to spread the word to the American people and to Members of Congress.

Gordon:  According to independent financial appraisals, what is the estimated value of the ROC bonds owed to U.S. bondholders?

Bianco:  Currently the American Bondholders Foundation represents over 20,000 American holders of these bonds in forty-four states. If you calculate in the same manner that U.S. Treasury would calculate a default with penalties and interest accrued and based on the gold standard it is in excess of 750 billion dollars.

Gordon:  Is it normal for successor governments to repudiate payment of prior government obligations?

Bianco:  Absolutely not. In fact if that was the position that successor governments took nobody would buy sovereign bonds globally. If the United States took that same position we could basically say to all of those who hold our U.S. Treasuries that bought them twenty or forty years ago, that those bonds were issued under a prior regime, a different government, a different administration, even a different political party so we are not going to honor those debts. In essence, that is what China has done. The People’s Republic of China (PRC) said that these ROC bonds were issued by a former regime therefore we are not going to accept responsibility for them with the exception of paying Great Britain in 1987. The PRC was told by Margaret Thatcher, you have to be responsible for your debts and obligations. As of today, the United States Government has failed to tell the PRC, you owe the American people repayment of ROC bonds. You owe our government for loans that have been made. You have to pay your bills and debts just as you expect us to do the same.

Gordon:  Besides the example of Great Britain's selective default negotiations with the PRC, are there any other examples of successor governments paying off prior regime debt?

Bianco:  Yes. The Federal Republic of Germany is still paying for the Weimar Republic debt. Russia has even been paying the French Czarist era debt. Great Britain paid the United States and Canada the last and final payment including interest and a thank you note, for the loans that we gave them back during World War II.

Gordon:  Did our government ever hold any of these ROC bonds and what happened to them?

Bianco:  They actually purchased many of these bonds. However, the U.S. Treasury declines holding any of them whatsoever at this time. If you look at their website where foreign government holdings are shown you will not see any of these ROC bonds. Well of course not because they are not current. They may be holding them on a different set of books of what is not collectible today and what may be collectible in the future. Treasury officials have informed us that yes, they do have them and they are holding them for the day when they may need them.

Gordon:  Has our government ever asked either the PRC or the Taiwan Government to discuss possible repayment of the defaulted ROC debt?

Bianco:  Actually, the only example that the American Bondholders Foundation has ever been able to come up with was during the Carter administration when the government actually went to the PRC who declined then went to Taiwan and asked and of course we are told, no. We are not the officially recognized government so those are the responsibilities of the People's Republic of China.

Gordon:  What happened when a group of American Bondholders of these ROC bonds went to Federal Court seeking repayment?

Bianco:  The minute that case was filed the U.S. State Department immediately stepped in on behalf of the PRC. There was a case, Jackson vs. the PRC, whereby bondholders here in the United States actually took China to court and tried to collect on that judgment. The PRC refused. The bondholders filed in U.S. Courts to seize assets of China on U.S. soil to satisfy the judgment. Immediately, China sent a scathing aide memoire, as it's referred by the U.S. Department of State, demanding that they control these bondholders. That effectively stopped this activity as the PRC threatened it would create significant damage to U.S. – China relations. China would take this very seriously causing economic damage and that they would hold the U.S. State Department solely responsible for these actions. In essence they became very threatening. This was a 1983 attempt to collect on these ROC bonds when the State Department stepped in. They provided an amicus court brief in the US federal court proceedings to protect China from being held accountable for repayment of these bonds.

Gordon:  What is the American Bondholder Foundation and who does it represent?

Bianco:  The American Bondholders Foundation was formed in August of 2001 following a year’s research, communications with Treasury, Securities and Exchange Commission, State Department, National Security Council, Federal Trade Commission and members of Congress seeking an avenue to collect on this debt. As a result U.S.A. Today published a news article. Bondholders who read that newspaper article had never realized how large the holdings were in the United States as well as around the world. They started calling me asking would I represent them because they had no place to go to get a return of what was owed to them from the PRC. Therefore, we created the American Bondholders Foundation to become a collective voice now representing over 20,000 U.S. citizens in 44 states to bring this to the attention of the United States Government. ABF demanded that laws and justice be upheld and China be held accountable for their debts and financial obligations to the American people.

Gordon:  What happened when Members of Congress made inquiries to our Treasury Department about repayment of defaulted ROC bonds held by Americans?

Bianco:  Congressman Gary Miller of Michigan sent a letter on April 6th 2012 to Secretary Geithner on this issue. The Under Secretary of the Treasury who replied to Congressman Miller basically advised they didn't even know that there were any bondholders in the US. I found this quite strange considering we have had several senior level meetings with Treasury. There has been written correspondence back and forth. There have been hearings on this issue. A lot of media publication on this issue. However, if you read their letter it basically states that we have other things going on with China that could benefit banks here in the U.S. and some Wall Street firms that want to be able to own up to 49% of affiliated businesses in China.  Obviously those business executives are not really interested in this bond issue or any money that is owed by China. Let bygones be bygones. Let's just move on to current events, current things. Let's kick the can down the road and not address this issue and in essence that's basically Treasury's position.

Gordon:  Have any Members of Congress submitted resolutions and or authorization legislation to enable discussions with the PRC Government about selective debt default repayments?

Bianco:  Yes, they have. There have been hearings in Washington on this issue over the past few years.  One with former Chairman Henry Hyde of  International Relations Committee and one with Congressman Brad Sherman, Foreign Affairs Sub-committee in the House. There have been bi-partisan resolutions in both the House and Senate. However, the minute these resolutions were issued the State Department intervened and threatening calls from Wall Street to back off this issue. This could cause problems in U.S. China relations. When there were other issues like intellectual property theft, currency manipulations, weapons proliferation, trade issues, they just didn't want to add another one to that list. So Congressional Members basically backed off, allowed this to slip through the cracks instead of standing up for what is right upholding the rule of law in America representing their constituent.

Gordon:  What action could the U.S. Administration undertake to seek repayment from the Chinese Government?

Bianco:  The President could send a message to China letting them know that they should come to the table and negotiate a fair settlement and resolve of this outstanding financial debt and obligation that they owe to the U.S. Government and to the American bondholders. The Administration has yet to inform the PRC that they need to resolve this issue. Further, the President could sign a proclamation, not even an executive order, but a proclamation, which effects a Corporation of Foreign Security Holders established in 1933 to represent U.S. citizens holding defaulted sovereign obligations of foreign governments. That Act in essence created an entity within the Securities and Exchange Commission that could negotiate with foreign sovereign debt issuers on behalf of U.S. citizens to bring about an amicable resolution to these outstanding defaulted sovereign bonds. That has yet to be done. That is what we are asking the Administration to do for the benefit of the American bondholders.

Gordon:  What assets held by China could be used for debt swaps and repayments?

Bianco:  The PRC could take US Treasury bonds that China holds and exchange them for ROC bonds that Americans hold. These debt swaps happen frequently. There have been more than 47 previous bond settlements by our government. The U.S. Government recognized the successor government doctrine of international law and told those governments you have some outstanding debts owed to Americans and to our government and we recommend that you come to the table and negotiate a settlement. Czechoslovakia, Bulgaria and Poland among others have honorably come to the table and resolved their outstanding financial obligations. China has yet to do that and the U.S. Government has yet to tell them that they need to.

Gordon:  How would selective debt default of these Chinese bonds impact U.S. public debt?

Bianco:  I believe that China’s sovereign debt ratings should reflect their selective default of ROC debt as issued by credit rating agencies like Standard & Poor’s, Moody’s and Fitch. This would curb their ability to raise capital in U.S. financial markets. That should be a huge incentive for the PRC to come to the table and resolve this issue.

Gordon:  Given this is an election year, why should presidential candidates be concerned about this issue?

Bianco:  We have a lot of problems with China. China has made their intentions very clear. They are a superpower. They became a superpower compliments of the American people and others around the world who have taken China from a third world country to most favored nation status to the WTO. We purchase 35% of China's exports, while they buy 5% of ours. China has made it perfectly clear as to their intentions.  They actually want their own currency to replace the U.S. dollar the global reserve currency. They have continued to flex their military muscle against the United States and many others in the Pacific region.  President Obama and any future president need to take steps to send a message to China. No more double set of standards. We need to uphold rule of law and that is why it is so important for Presidential candidates today. It has a direct effect on our economy. We do not need to raise our debt ceiling again.  When these bonds and the money owed to the American government and to the American people can be used to reduce our debt ceiling instead of increasing it. It is up to our Congressional leaders, and the Administration to uphold the rule of law and send that message to China. The American people are going to be looking at these Presidential candidates when they go to the polls in November. Asking whom is going to represent best economic interests of American citizens.

Gordon:  Ms. Bianco, I want to thank you for this stunning and engrossing interview.

Bianco:  Thank you sir.

Also see Jerry Gordon's collection of intervews, The West Speaks.


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