TRADE, TARIFFS, AND OLD CHINESE BONDS…September 6, 2019
I'm constantly reminded how astute the readership of this site is, for the articles that people find and pass along, oftentimes with their own observations, are endlessly deep rabbit holes, each and every one. But that's especially the case with today's article shared by J.C., who wonders what I think the relationship between the story and the current tarrif-trade war going on between Mr. Xi and Mr. Trump might be. The story, in brief, is that there are lots - lots - of bonds from the Chinese government out there, not only from the old Imperial government, but from the Republic of China, i.e., the Nationalist/Khoumintang government, which, let us recall, is still in existence on Taiwan. Hold on to that little bit of data, because it will become important in today's high octane speculation.
But first, the article:
The thesis of this story is simple, and laid out in the first three paragraphs of the article:
President Donald Trump’s next move in an increasingly fraught trade war with China could be one for the history books, literally. The Trump administration has been studying the unlikely prospect of reviving century-old claims on Chinese bonds sold before the founding of the communist People’s Republic.
The defaulted China bonds can be found in the attics and basements of thousands of Americans, or on EBay, where the certificates sell as collectibles for as little as a few hundred dollars each. The PRC, which succeeded the Republic of China after it replaced the imperial dynasty, has never recognized the debt, though that hasn’t stopped decades of attempts to collect payment on it.
Now, with Trump ratcheting up the trade rhetoric with China, holders of the antiquarian bonds are hoping he’ll press their case, even as other parts of the U.S. government are accusing people of fraudulently selling the same paper.
Nor is this some fanciful hope; serious people, the article continues, are involved in the effort:
Perhaps the only thing more peculiar than the story of the Chinese debt and the bid to seek payment on it, is the cast of characters drawn into its orbit. President Trump, U.S. Treasury Secretary Steven Mnuchin, and U.S. Commerce Secretary Wilbur Ross have met with bondholders and their representatives. Kirbyjon Caldwell, pastor of a Texas megachurch and spiritual adviser to George W. Bush, has been charged by the U.S securities regulator for selling the debt to elderly retirees. (Caldwell has pleaded innocent and maintains that the bonds are legitimate.)
“With President Trump, it’s a whole new ballgame,” says Jonna Bianco, a Tennessee cattle rancher who leads a group representing pre-revolutionary China bondholders and who has met with the president.(Emphasis added)
All of this, of course, sounds fanciful, but it revolves around a point of law. As the article, citing Jonna Bianco, explains:
“The People’s Republic of China dismisses its defaulted sovereign obligations as pre-1949 Republic of China debt, but doing so contradicts the PRC’s claim that it is sole successor to the ROC’s sovereign rights,” Bianco said in an emailed statement in response to this story.
Bianco says she’s spent years researching the issue and recruiting high-profile proponents to the ABF team, including Bill Bennett, who was U.S. Secretary of Education under Ronald Reagan; Brian Kennedy, senior fellow at the Claremont Institute; and Michael Socarras, Bush’s nominee for Air Force general counsel.
She argues that China is in selective default, having paid out on bonds held by British investors in 1987 as part of the Hong Kong handover deal negotiated by former Prime Minister and ‘Irony Lady’ Margaret Thatcher. If China doesn’t pay out, she says, it should be blocked from selling new debt in international markets. (Emphasis added)
And there you have it. The problem, of course, is that the legalities themselves are dodgy:
People familiar with the Treasury Department say the China bonds have been studied, but ABF’s suggestions—including the possibility of selling the defaulted debt to the U.S. government to then exchange with China—aren’t legally viable. Spokespeople for Treasury and Commerce declined to comment. People familiar with the views of Chinese officials say they’re aware of the meetings, but they don’t think the claims can be revived.
At issue is a statute of limitations that has long run its course and the fuzzy legal obligations of governments that inherit their predecessor’s debts following civil upheavals. In one of the most famous cases, the Soviet Union repudiated bonds sold under the Tsar, inflicting losses on thousands of investors who had snapped up the paper. Still, most agree that as a legal principle, political regimes inherit their predecessors’ debt; most governments choose to honor old bonds, in part because they don’t want to alienate investors who might buy new ones.
“I think everyone who works for Trump at the Treasury Department thinks this is loony,” says Mitu Gulati, law professor at Duke University and a sovereign-debt restructuring expert. “But I can’t help but be tickled pink, because at a legal level these are perfectly valid debts. However, you’ve got to get a really clever lawyer to activate them.”
But now there's a few problems that, of course, don't appear on the conventional radar of conventional narratives. I've already mentioned that the Taiwanese government still exists. So whose debt is it? The Communists'? or the Khoumintang's? Since many of the bonds were issued by the latter when they were the mainland government, one would have to assume that it is Taipei's, not Beijing's, loathsome as the latter regime is. But even there, there are two significant legal flies in the ointment. The first is, as the article points out, is Beijing's claim to represent the successor of the previous government. And the second is that the USA, while maintaining its ties to Taiwan, has by recognizing and establishing diplomatic relationships with mainland China also recognized those claims.
So could these bonds be, as the Bloomberg article avers, an "ace up the sleeve" in the Trump administration's strategy vis-a-vis China? Perhaps, but if it is, I would urge them to take another look, and consider some "other problems" that the mainstream press will never consider nor talk about, and that's those "Morgenthau Gold-backed bearer bonds", remember them? Well, if you're working for the Fed or the Treasury, you probably don't, and even if you do, you're probably going to dismiss the whole thing as a kooky story and pay it no attention. And one reason you're not going to pay attention and dismiss it is that if it is true, then it spells big trouble. The story goes that in the 1930s, as the Nationalist Chinese government of Chiang Kai-shek was struggling to contain the Japanese invasion, that it transferred a large amount of its gold bullion to the United States Federal Reserve for "safe-keeping" to prevent its possible capture by the Japanese. In return for this physical transfer, the Khoumintang government received bonds that were backed by that very gold. It was a novelty to be sure, for the bonds effectively functioned as certificates of deposit, in one sense, but also as a financial asset on the other (and hence, probably the reason that the Khoumintang may have insisted on bonds rather than just certificates of deposit). In any case, the story goes that these bonds were called "Federal ReserveD Bonds" (with a "d"), and were issued over the signature of Roosevelt's Secretary of the Treasury, Henry Morgenthau. (One wonders if Soviet agent Harry Dexter White any anything to do with this, but that's another speculation for another time.) The authenticity of these so-called "Morgenthau bonds" has always been denied by the US Government. And therein lies the rub, because the bonds weren't issued by the US Treasury, but by the US Federal Reserve (which supposedly doesn't issue bonds at all).
Now, frankly, I've always thought this whole story was substantially true; it's the sort of thing one would do to rip off some other government's gold, especially if the ultimate objective was to turn that gold over to its arch-rival, Mao's Communists. (Enter Harry Dexter White...) And the Morgenthau bonds story became the template, as it were, for several bearer bonds scandals after the war, including Japanese Prime Minister Tanaka's "57 bonds" scandal.
But what does all this mean? Well, for all you folks high up in the Treasury or better, the Fed, it means simply that if either Beijing or Taipei (or in the ultimate nightmare, both) produce originals of those bonds along with reasonable provenance, and any other evidence for or intelligence or hitherto undisclosed facts aboutthat gold transfer, either Taipei or Beijing (or both) could insist on a physical return of that gold - plus interest in bullion - before any talk of payment on those other bonds proceeds. And of course, the Chinese have been buying gold like crazy... and the Germans had a spot of trouble getting their gold from the NY Fed, which actually lost it in 1928 (according to the ever-oily Hjalmar Schacht). But of course, those stories couldn't possibly be related to today's high octane.
Just a thought. You know me... high octane speculation &c &c...
See you on the flip side...