American creditors say China should honour pre-Communist debts

LIKE many Americans, Jonna Bianco believes President Donald Trump to be “a tireless defender of the American people against Chinese economic aggression”. Ms Bianco, a Tennessee cattle-rancher, is president of the American Bondholders Foundation (ABF), which represents more than 20,000 owners of bonds issued by Chinese governments before the Communist revolution in 1949—and which claims that American citizens are owed more than $ 750bn. Having met Mr Trump at his golf resort in New Jersey last month, Ms Bianco hopes he will press their case.

The ABF’s claim is built on the widely accepted doctrine that governments inherit their predecessors’ debts. Pre-Communist Chinese governments flooded international markets with debt, such as a £25m (then $ 122m) issue of “gold loan” bonds in 1913. “As a legal matter, those debts still exist,” notes Mitu Gulati of Duke University. “But so too does the statute of limitations.”

Sovereign debtors are usually keen to repay or restructure debt rather than repudiate it, in order to retain access to capital markets. Last year Russia repaid the last of its outstanding $ 70bn Soviet-era debt. In 2010 even North Korea attempted to settle part of a debt to the Czech Republic—with $ 500,000-worth of ginseng root.

But some governments do repudiate debt in a symbolic rupture with their predecessors: the young Soviet Union shocked the world when it disavowed Tsarist debt in 1918. (The debt was mostly written off in 1996.) They might also disown the “odious debt” of despotic regimes, although this concept is hazy. Its proponents argue that, just as individuals are not liable for fraudulent borrowing in their name, entire populations should not have to repay debts run up by deposed tyrants. When he was America’s president, George W. Bush supported writing off Iraqi debt incurred by Saddam Hussein (America cancelled all of the $ 4.1bn it was owed). Such write-offs, says Lee Buchheit of Cleary Gottlieb, a law firm, usually rely on creditors’ goodwill.

Diplomacy is the usual route to settling the debts of past regimes. China and Britain struck a deal in 1987 for a payment to British holders of imperial bonds. An absence of diplomatic relations helps to explain why the ABF has not pursued Taiwan with the same vigour as it has China. (In 1990 Taiwan’s finance ministry said that repayment “shall be held in abeyance pending the recovery of mainland China”.)

A settlement with China through Trumpian diplomacy looks unlikely. The ABF is nonetheless demanding a hefty payout—although it realises it may have to accept some discount from its outlandish estimate of its due, which is based on assumptions about decades of unpaid interest and forgone capital gains. Meanwhile, a Chinese gold bond of 1913 with a face value of £100 sells for around $ 250 on eBay. The certificates seemingly appeal more to investors in antiques than to investors in debt.

This article appeared in the Finance and economics section of the print edition under the headline “A timeless argument”