Fri, Aug 23, 2013 - Page 8 News List

War bonds are a ticking debt bomb

By Jonathan Levy

Will the rumored reconciliation between the Chinese Nationalist Party (KMT) and the Chinese Communist Party (CCP) trigger a little-known clause that will force the redemption of billions of dollars in defaulted Chinese government debt?

In 1949, Chiang Kai-shek’s (蔣介石) Nationalists made a successful last stand on the island outpost of Taiwan against the almost victorious red tide of Mao Zedong (毛澤東). However, prior to 1949, Chiang’s Republic of China (ROC) was a profligate issuer of sovereign bonds, most of it backed by gold. These bonds sold around the world and were underwritten by the largest banking houses like HSBC, Barings, Bank of China and JPMorgan. They were viewed as gilt edge investments with a high rate of interest.

The bonds were used to finance the wars against Japan and the Communists, Chinese infrastructure like railroads, and they helped to modernize China. The bonds also put China deep into debt. By 1939, the war with Japan had forced China to suspend payments on most bonds, though additional victory and liberty bonds sold in China and the US helped finance the successful war effort against Japan.

By 1949, China had redeemed some of its World War II debt, and had Chiang defeated the Communists, he would undoubtedly have dutifully begun to pay off the remainder, some of it dating back to the Imperial days of China’s Boxer Rebellion reparations, in order to keep the nation’s credit rating above water. However, after being forced to retreat to Taiwan in 1949, the Republic of China in exile had no alternative but to put the bonds into hibernation.

The ROC Presidential Order on Oct. 29, 2003, implemented from March 1, 2004, by the Order of the Executive Yuan Article 63 of the Act Governing Relations Between the People of the Taiwan Area and the Mainland Area (台灣地區與大陸地區人民關係條例) states:

“To the extent not contrary to the public order or good morals of the Taiwan Area, it shall be upheld the legal effects of any civil matter together with any right or obligation thereof created in the Mainland Area, prior to the coming into force of this Act, between any of the people of the Taiwan Area and the Mainland Area, or between any two or more of the people of the Mainland Area, or between any of the people of the Mainland Area and any foreign national.

“The provisions of the preceding paragraph shall not apply provided that there had been laws or regulations in effect, prior to the coming into force of this Act, restricting the exercise or transfer of the rights referred to therein.

“The following debts shall not be repaid prior to national unification:

“1. Outstanding foreign currency bonds issued in the Mainland prior to 1949 and the short-term Gold Bonds of 1949.

“2. Various debts owed by any government bank, as well as any other financial institution accepting deposits before their retreat from the Mainland.”

According to former minister of justice Cheng Chung-mo (城仲模): “The intent of this Act in regards to pre-1950 Chinese bonds was to reaffirm their existence as defaulted foreign debt obligations of the Republic of China owed in the United States and elsewhere and to defer their resolution until national unification. These bonds referred to in Article 63 were all issued by the former Kuomintang government of the Republic of China or were ratified by the Kuomintang government.”

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