KUALA LUMPUR (July 5): China is reportedly currently in default on its sovereign debt held by American bondholders, according to a conservative American policy analyst.

The US newspaper and digital media company The Hill published an opinion piece authored by Andrew Hale on its website on Tuesday (July 4), saying a private group of American citizens holds a large quantity of these gold-denominated bonds.

The Hill focuses on politics, policy, business and international relations, while Hale is the Jay Van Andel senior policy analyst in trade policy at The Heritage Foundation, an American conservative think tank based in Washington, DC.

Hale said that a citizen-led group known as the American Bondholders Foundation (ABF) serves as trustee with power of attorney for some 20,000 bondholders, whose bonds are valued at well more than US$1 trillion (RM4.6 trillion).

He explained that before 1949, the government of the Republic of China (ROC) issued a large volume of long-term sovereign gold-denominated bonds, secured by Chinese tax revenues, to private investors and governments for the construction of infrastructure and financing of governmental activities.

“Put simply, the China we know today would not have been possible absent these bond offerings,” said Hale.

He explained that in 1938, during its conflict with Japan, the ROC defaulted on its sovereign debt.

“After the military victory of the communists, the ROC government fled to Taiwan. The People’s Republic of China was eventually recognised internationally as the successor government of China. Under well-established international law, the 'successor government' doctrine holds that the current government of China, led by the Chinese Communist Party, is responsible for repayment of the defaulted bonds,” Hale wrote.

He said that to this day, China has had access to US capital markets while openly rejecting its sovereign debt obligations to American bondholders, adding that the age of these bonds “is irrelevant”.

What matters is that this is a sovereign obligation, he added.

Hale said that as recently as 2010, the German government made its last payment for reparations from World War I. Meanwhile in 2015, Great Britain made payments on bond issuances that dated from the 18th century, on the return of Hong Kong to China.

He pointed out that President Joe Biden’s administration and the US Congress have a unique opportunity to enforce the well-established international rule that governments must honour their debts.

According to Hale, the Chinese bonds held by the ABF should be acquired and utilised to offset (partially or in whole) the US$850 billion-plus of US treasuries owned by China (reducing up to US$95 million in daily interest paid to China).

“This would lower the national debt and put the US in a better financial position globally,” he noted.

Hale claimed that over the last two decades, there had been recurrent bipartisan support in Congress for bondholders to address China’s default with several congressional resolutions.

“Despite this, successive US administrations have been silent on this issue, choosing to kick this can down the road, assuming that China would eventually liberalise and embrace Western norms and values,” he added.