By Peter Huessy
Many people assume China
has the U.S. over a barrel. The country buys so much of our debt—around
$800 billion—that we cannot “rock the boat” when it comes to U.S. and
China relations. That has meant not pressing the PRC “too hard” when it
comes to North Korea, or Iran.
Just recently, a top Obama administration
delegation visited the People’s Republic of China. While there, the
Chinese were told not to worry about the U.S. paying its debts to the
country — their investments in the U.S. were safe. True enough.
But, I was struck with the fact that the
PRC, however, does not pay its debts to the U.S. Now, that may strike
most Americans as a “You must be kidding story”. But in fact it is true.
Many 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 U.S. artists from unpaid royalties on the more recent sale of
pirated CD’s and videos, but that's another story).
In 1987, threatened with being kept out of
the British financial markets, China acknowledged the debt in 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.
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.
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