America keeps spending and spending and spending. The country has run up a massive amount of debt… most of it under the watch of President Barack Obama. But what we hear over and over again is that much of this debt has been backed by China…. that they exert power over us, because we owe them so much money. Think again! In reality, it is China that owes… and it owes America close to $1 trillion.
As pointed out by Richard Parker in an article on the McClatchy-Tribune, China sits in default of bonds purchased by Americans as well as governments around world.
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.
The story begins nearly 100 years ago, in 1913, when the government of China began issuing bonds to foreign investors and governments for infrastructure work to modernize the country. As the country fell into civil war in 1927, paying these debts became increasingly difficult and the government fell into default. Even so, in April 1938, the Nationalist government of China began to issue U.S.-dollar denominated bonds to finance the war against Japan’s brutal invasion.
Parker adds that throughout the 1940s, the U.S. government continued to help finance China’s government, but the with the rise of the People’s Republic of China, all bets are off as far as their desire to repay this debt. Except for one. Great Britain.
As pointed by Peter Huessy in a Fox News story:
In 1987, threatened with being kept out of the British financial markets, China acknowledged the debt it owed from the sale of these exact same bonds to British investors. 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 bond owners worldwide, including U.S. bondholders, China “selectively defaulted” on these bonds.
So why is Great Britain getting repaid, but the U.S. isn’t?
Richard Parker points out that if Barack Obama took action, the dominoes would begin to fall:
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.
The problem isn’t just with our government. The problem is that everyone seems to be turning a blind eye toward China and assuming they are more powerful then they are, and not holding them accountable for their actions. Standard and Poor’s refuse to degrade China’s credit rating despite the massive default on their debt obligations. America’s Security and Exchange Commission (SEC) has failed to act as well.
From Peter Huessy:
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 if China was found in selective default, this would cause the PRC to have to pay considerably more to finance its debt than it does now. Billions more.
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?
All America has to do is get the ball rolling. The British government spoke up, and the debt was repaid. What is America afraid of? The credit rating of China is not accurate. They are in default. Adjusting that rating would help America. Paying their debt would help America. And holding them accountable shows them that if they want to sit at the grown-ups table, they need to act like grown-ups.