That was then, this is now, Chinese bond edition

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…

George LaBarre, a specialist vintage financial paper dealer, says the price of the 1911 Hukuang bond has gone from $75-100 to about $450.

Here is more from the FT, via Malinga Fernando.

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What "former" Republic of China? The RoC is alive and kicking, headquartered in an island big enough to see from space. And if I'm not wrong, they kept their international financial assets after the civil war. Aren't the liabilities also theirs?

Your mom is big enough to see from space.

I believe every astronaut could "see from space". Thank the Gemini astronauts who refused to be "Spam in a can" and got a window in the capsule.

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Exactly. If we’re going to play games, you can’t claim the Republic of a China ceased to exist. Give it a few more years.

And in any case, you wouldn’t need to make a claim against China. I’m pretty sure the US still disburses money from the Boxer Rebellion reparations. That goes mostly to Tsinghua last time I checked.

And there are more recent claims, potentially.

When the PRC was declared, lots of property was confiscated from foreigners. I think in the 80s there was a process to claim compensation. I think a majority of those with claims declined to do so. But I'm not sure they have actually forfeited their rights.

Finally, why would it only be the PRC and ROC reckoned as successor states? Shouldn’t Mongolia also be on the hook?

Mongolia declared indepence in 1911. The Soviet Union/Russia has helped to maintain Mongolia indepence from China ever since. So I guess it is not an option.

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That is an interesting question. I might argue that PRC rejects that premise as it would violate the One Country Two Systems claims it always makes and is core to its essence.

ROC/Taiwan might want to pursue that from a political stance to country the political isolation PRC has been mounting against it. That could help reestablish political recognition globally, and perhaps even force recognition by the UN (thought I'm not sure if PCR could then veto any such attempts).

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What makes them think that Winnie the Pooh and the CCP will treat those old legal obligations any better than the Joint Declaration on Hong Kong?

@Anon7 - that must be proof therefore that China is not communist, or even fascist, but very modern and democratic. It's because it's been said that communist / fascist countries took great pains to keep a stellar reputation on the international capital markets. In fact, one theory is that the Ukraine holodomor occurred because Stalin shipped wheat into the international markets in order to maintain the USSR's credit standing. Likewise the Romanian dictator Nicolae Ceaușescu was good debtor on the international credit markets, though his economy was in shambles. Compare to democratic Argentina.

The Bolsheviks repudiated Russia's large public debt in 1918 and nationalized foreign assets.

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"It's because it's been said that communist countries took great pains to keep a stellar reputation on the international capital markets. "

Is that true Ray? The Communist states were notorious about nationalizing foreign assets. Did they exempt foreign loans?

"In February 1918, after the Russian Revolution, the repudiation of the debt by the Soviet government shocked international finance and triggered unanimous condemnation by the governments of the great powers. The British, and especially the French, had lost millions of pounds of foreign investment in Russia."

"ALLOWAY: Well, the People's Republic of China has never officially recognized the debt. So to them, they argue that it falls under this sort of nebulous legal concept that we call odious debt"

Some communist countries redeemed at least some of the pre-revolution/coup/conquest. But communist countries certainly did their utmost to honor their own debts as a way to keep lending sources open to them. Ceausescu was really a really good example.

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Socialism with Chinese Characteristics and especially Winnie the Pooh's Socialism with Chinese characteristics for a New Era (in which China is no longer a desperate second or third world economy) seem to throw a bit of a wrench in that theory.

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Yeah, even if we disregard that China will simply not pay for those loans from any point of view, the point of view that China should pay them is also quite weird. After all, communist China was not recognized as China in UN for 26 years. The concept, that they are now somehow responsible for Republic of Chinas' debts, which still exists as a country and maintains heavy anti PRC stand, seems "farfetched". And I do use the term "farfetched", because I am a gentleman and using "fucking ridiculous" is too rude.

@Konstantinov Roman - you're a gentleman and a scholar, kid. Scriptophilly...there's a word of the day! - RL

https://www.independent.co.uk/money/eighty-years-later-the-tsarist-bond-pays-off-1283278.html ("In 1987, the People's Republic of China partially settled outstanding claims by UK holders of Chinese bonds")

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I suppose they can file their claims in a mainland Chinese court and see how far they get...

If China is not going to held accountable for its premature termination of the HK handover agreement or its illegal harassment of fishermen in international waters, it's not clear how holders of century-old debt obligations are going to do any better.

+1

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Hilarious how such "discoveries" are always made when certain other countries get ridiculously indebted and suddenly need all the help they can get...

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"People’s Republic of China...a legal argument"

Ah, there's the flaw.

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Cowen's point likely isn't whether China will repay these bonds, but that an investor places value on these bonds because of the likelihood that another investor will place a higher value on these bonds. It's irrelevant that China will never repay the bonds. Now fast forward to the year 2020 and the economic crisis caused by the pandemic and the bonds issued by the US government (and other governments). Will those bonds ever be repaid? If not, why do investors place value on them? Indeed, why do investors place value on corporate bonds, or corporate equities for that matter? Confidence. Donald Trump owes over one-half billion dollars that is coming due over the next couple of years. Will he be able to repay that debt? He has a history of defaulting on his debt but that hasn't deterred lenders from having enough confidence in him to extend him credit. I suppose Trump would be in a better position to renegotiate or refinance the debt if he were president. An aside, one will recall that the word con derives from the word confidence. China bonds, indeed!

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I remember having read about pre-WW II Polish bonds the communist regime, against the odds, redeemed.

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According to the website, the largest bond was a £25,000,000 bond issued at 5% in 1913 set to mature in 1960, which the Republic of China defaulted on in 1938. The Republic of China still exists, of course, and it’s quite understandable that it defaulted in 1938 given what was going on. So it seems that Japan is really to blame. 25 million pounds was significantly less than the amount China was forced to pay to Japan after the first Sino-Japanese War (or the Boxer Indemnity for that matter). That indemnity should have been returned to China after the Second Sino-Japanese War much as the huge Franco-Prussian indemnity was returned to France after the Treaty of Versailles, and would have easily paid off these debts. The current Chinese government did not touch these debts at all and was not even the internationally recognized government at the time the debts were to mature in 1960. It’s actually pretty shockingly unfair how after World War II, the Western Allies essentially sided with the former Axis powers over the former Allies of the USSR and China which had been most devastated by the war with tens of millions of dead each and which should have received way more reconstruction reparations from the Axis aggressors. I’d say the unrepaired devastation in those countries is a significant reason why the Nationalists lost the Chinese Civil War and why the USSR turned hostile to the West.

"It’s actually pretty shockingly unfair how after World War II, the Western Allies essentially sided with the former Axis powers over the former Allies of the USSR and China"

Taking sides has nothing to do with it. The objective of the Allied countries was to rebuild all war-torn countries in such a way that they would support modern industry and a middle class that would reject Communism. Marshall Plan aid was offered to the Soviet Union and Eastern-bloc countries but was rejected because, of course, the Soviets had no interest in seeing these countries develop into bourgeois, capitalist democracies.

Some historians dispute the narrative that reparations after WWI led to the rise of the Nazis but that was a common enough view that it probably shaped Western views of what should be done with Germany. Forcing German citizens to accept a lower standard of living in order to pay large-scale reparations probably would have led to renewed nationalism, perhaps even with a Communist flavor, which the Soviet Union would have been more than happy to exploit. I think what happened instead was a wise move. I don't know enough about Western Allied help to China after WWII.

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The other problem with reparations in the modern world, which became clear from the German post-WWI experience, is that modern countries care a lot less about getting temporary free stuff from foreigners than they do about building economies that employ their own citizens at middle class wages. Germany paying reparations to France meant exporting goods in international markets and using the foreign currency earned -- dollars, Francs, or Pounds, for instance -- to pay France. Who are they going to export to? Only a country that is willing to open itself up to German exports and will not engage in protectionism. Wait a minute, some people will say, why are we putting our own domestic industry at a disadvantage while helping Germany develop the know-how and economies of scale to support industry once its debts are paid off? Why should our workers have to compete with German workers just so France can get its reparation payments?

The answers are not obvious. Things were a lot simpler back in the days when reparations meant carting away slaves and jewels. But in a modern, globalized world, one has to question the underlying logic.

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" It’s actually pretty shockingly unfair how after World War II, the Western Allies essentially sided with the former Axis powers over the former Allies of the USSR"

The USSR was an Axis power up until their ally the Germans backstabbed them. The Allies didn't "owe" the Soviet Union anything. The Soviet Union invaded Poland at the start of the war and forcibly controlled it for decades after the war. Furthermore, the USSR annexed about a quarter of German territory to Poland and itself after the war.

Regarding China, the US was an ally of the Chinese up until the 1949 Communist takeover.

I don't know about "owe", but the Allies were fortunate that Germany attacked the Soviet Union.

"I don't know about "owe", but the Allies were fortunate that Germany attacked the Soviet Union."

+1, And also,

The Allies were lucky the Japanese attacked America/Phillipines

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What sank the Nationalists was lack of popular support compared to the CPC whose ideology was perfectly pitched for the impoverished masses that lived in the countryside and in the slums of the cities. China was a very poor country in those days. The Nationalists depleted their ranks fighting off the Japanese and relied heavily on conscription to fill it back up which would later bite them in the back when those troops defected at the first opportunity.

The US did play a small role. In addition to military aide, it gave nearly $4 billion to the KMT but the corruption was so bad that some of it found its way back (!) into New York real estate.

Truman himself said: "[The Chiangs, the Kungs, and the Soongs] were all thieves, every damn one of them. They stole 750 million out of the [$3.8] billions that we sent to Chiang. They stole it, and it's invested in real estate down in Sao Paulo and some right here in New York."

https://www.telegraph.co.uk/education/3320987/Madame-Chiang-Kai-Shek.html

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"Sinking Fund Gold Loan of 1911"

Typo: I think that should be Sinkiang Fund...

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Another reason not to trust communists.

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https://www.bloomberg.com/opinion/articles/2019-08-29/put-your-business-in-a-box

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