China's Debt Default….To US Investors

A senior Administration delegation has just left the People’s Republic of China. While there, the Chinese were told not to worry about the US paying its debts to the country — their investments in the US were safe. True enough.

But, I was struck with the fact that the PRC, however, does not pay its debts to the U.S.

Several decades ago, China sold sovereign bonds worldwide to investors in many nations. They sold tens of thousands of these bonds on U.S. soil to American citizens on the recommendation of our government, indicating it was a solid investment.

Over the last sixty years, China has refused to pay to these bondholders either the principal or interest on these full faith and credit sovereign bonds. (To say nothing of the hundreds of billions also owed to US artists from unpaid royalties on the more recent sale of pirated CD’s and videos).

In 1987, threatened with being kept out of the British financial markets, China acknowledged the debt. As part of the Great Britain-PRC agreement on Hong Kong, the PRC agreed to pay its debt to British citizens who owned these same bonds. By paying the British bondholders, but no other owners worldwide, including U.S. bondholders, China “selectively defaulted” on these bonds.

Standard and Poor’s claims it does not have to find the PRC in selective default because under their view of things, it is their first amendment right NOT to discuss certain things or take such things up. Well, not so fast, boys and girls.

Under the rules, they are granted a license by the Security and Exchange Commission (SEC) of the United States to be a nationally recognized statistical rating organization (NRSRO), a charter to assess the risk of investing in sovereign and corporate debt, stocks, or bonds. The “selective default” of the PRC must be acknowledged, in that the metrics used by the NRSRO organizations that they themselves have promised to follow as part of their license agreement includes just such a requirement. Now this would cause the PRC to have to pay considerably more to finance its debt than it does now.

But because everyone thinks the PRC is the strong economic horse, S&P fudges this issue big time and does a disservice to the American people. It is as if you could pay a credit agency to write-up your credit score according to your own rules! Well, wouldn’t that be nice!

Our fiscal house needs to be put in order, true. But currently, the People’s Republic of China owes a debt of over $750 billion to American citizens who are holding these full faith and credit sovereign bonds (many of them denominated in gold) sold to them by the Republic of China. Worldwide, the debt China owes to all bondholders is estimated to be several trillion dollars.

The debt owed to the American people should be paid. The US government could dollar for dollar offset bond interest we owe China with interest, principal and penalties China owes us.

That would be $750 billion. Split 10 to 1, the US taxpayer saves $700 billion in debt payments and the bond holders receive the balance. As part of the deal, each state could receive badly needed investment funds as well.

And we could contribute significantly over a period of years to reduced U.S. debt. That could even be part of the upcoming budget and debt agreement, paid down over a period of years.

Yes, America pays its debts. Now let’s ensure China does too.

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