Former US national security adviser Zbigniew Brzezinski wrote that Americans seeking to preserve the country’s global primacy must, as in chess, think several moves ahead, anticipating possible countermoves.
His advice springs to mind as tensions between the US and China over data security, trade and intellectual property theft escalate. Both sides are openly flexing their economic and military power. But geopolitical shifts rarely depend only upon visible leverage and America may yet hold a trump card.
What would happen if President Donald Trump took his rhetoric about “making China pay” for Covid-19 to its logical conclusion? Leading Republicans like senator Lindsey Graham say the US should consider cancelling the $1tn-plus China holds in US Treasury obligations to seek reparation.
The obvious critique is that America’s credit rating would crater if it repudiated some of its debts. The US depends on external financing and cannot afford to alienate bond buyers. Even if other investors could be persuaded that a select Chinese-state-only default was justifiable, who could take over the financing burden?
Yet, none of this renders the “make China pay” policy dead in the water. In chess, new context empowers previously redundant pieces. And one such piece could turn out to be some $1tn-plus (when compound interest is accounted for) of yet-to-be-cancelled pre-People’s Republic of China debt ranging from the Hukuang Railways Sinking Fund Gold Loan of 1911 and the Reorganisation Gold Loan of 1913, to the so-called Liberty Bonds of 1937.
Long forgotten, these bearer bonds — denominated in sterling, Swiss francs, Russian roubles, Deutsche marks or US dollars — exist mostly in people’s private collections or attics. The most relevant were issued either by the former Republic of China or the preceding Imperial Chinese state to raise money for big development and infrastructure projects. Some were secured against revenues from Chinese natural assets like salt resources.
When the People’s Republic of China was founded in 1949, its leaders broke with the tradition of maintaining the debt obligations of previous regimes. But they never formally de-recognised the debt. The bonds instead went into default, taking on mainly antique value.
Mitu Gulati, a professor of law at Duke University who has been studying the bonds, believes a legal argument could be made to revive some of the claims. Some of the old obligations include legal clauses that suggest new Chinese debt cannot be issued until old debt has been dealt with.
The 1912 and 1913 issues continued to trade speculatively on the London Stock Exchange until 1987, when some investor bets appeared to pay off. The UK government under Margaret Thatcher managed to negotiate a final settlement that raised £20m for British holders of the bonds at a time when China wanted to enter the London capital markets and there were active negotiations over the return of Hong Kong to China.
Prof Gulati argues that in the right diplomatic context, American holders of old Chinese debt could argue for a debt swap or “set off” against existing US Treasury debt. Tennessee-based Jonna Bianco heads the American Bondholders Foundation, which says it represents $1.6tn in claims. A Trump supporter, Ms Bianco says recent events have strengthened her hand. The legal merit of the claims is clearly debatable but speculators are taking interest. The value of historical bonds traded on eBay and among specialist dealers has been rising. George LaBarre, a specialist vintage financial paper dealer, says the price of the 1911 Hukuang bond has gone from $75-100 to about $450.
Are investors betting that Mr Trump will really use the bonds to put pressure on the Chinese government? Perhaps. But they may also hope his rhetoric alone will be enough to boost their value. Stranger things have happened.
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