FOR REVIEW OF SOVEREIGN CREDIT RATING OF THE PEOPLE’S
REPUBLIC OF CHINA
Opinion Issued by Stites & Harbison PLLC Affirming Validity
of U.S. Citizens’ Claims Against the People’s Republic
of China Relating to Defaulted Sovereign Obligations of the
of Testimony Before the International Relations Committee
of the United States Congress House of Representatives.
January 20, 2004.
In light of certain
past defaults by the Chinese Government on sovereign debt
issues and the continuing refusal of the present government
of China to honor payment of defaulted external bond issues
as required under international law, it is appropriate at
this time to conduct a review of the sovereign rating assigned
to long-term debt issued by the national government of the
People's Republic of China.
exist numerous defaulted Chinese Government bond issues, the
obligations whichare specifically the subject of this research
bulletin are those obligations issued on a global syndication
basis as the "Chinese Government Five Per Cent Reorganization
Gold Loan of 1913". These bearer obligations were issued
denominated in British pounds sterling, in both £20
and £100 increments and were due to mature in 1960.
The Chinese Government
Reorganization Gold Loan Bonds (the “Bonds") were
issued as full faith and credit obligations of the Chinese
Government. A substantial number of the Bonds are held by
United States citizen bondholders which constitute a valid
claim under existing international law (please refer to attached
legal opinion issued by Stites & Harbison, PLLC).
The Bonds are presently
in default. The successor government, the People's Republic
of China (the “PRC"), has refused and continues
to refuse to pay the claims of U.S. citizen bondholders of
these obligations. The holders of the Bonds who are U.S. citizens
are in the process of asserting a claim against the PRC for
payment in full of the defaulted Chinese Government obligations.
bondholders' claims have been consolidated under the auspices
of the American Bondholders Foundation, which is pursuing
payment of the defaulted securities in conjunction with the
Foreign Bondholders Protective Council. The cumulative value
of the defaulted Gold Loan Bonds claim being asserted against
the PRC by U.S. citizens is approximately $125 billion. The
American Bondholders Foundation also represents U.S. citizens
who are holders of various other defaulted, U.S. dollar-denominated
Chinese Government bond issues in asserting claims for payment.
In view of the
foregoing factors and for the reasons discussed below and
in the attached legal memorandum, Sovereign Advisers at this
time issues a Downgrade Alert for Long-Term Debt of the People's
Republic of China to sub-investment grade status.
1. Refusal by
the PRC to Pay Defaulted Sovereign Obligations in Contravention
of International Law:
of the Government of the People's Republic of China to honor
a legally valid claim asserted by U.S. citizens as holders
of the Chinese Government Reorganization Gold Loan Bonds.
The Bonds are full faith and credit obligations which under
international law are legally binding upon the PRC as the
successor government to the National Government of China.
The position of the PRC with respect to refusal to pay holders
of full faith and credit sovereign obligations is in flagrant
violation of international law (see Restatement (Third)
of the Foreign Relations Law of the United States, Section
712(2) and Creditors Claims in International Law, The International
Lawyer, Volume 34, page 235, Spring 2000).
of a Significant Contingent Liability:
a significant contingent liability in the form of potential
financial impact of bondholder claims on the PRC's external
payments position in the event of an eventual settlement
of bondholder claims, which would likely exert a material
adverse effect on the PRC's external payments position,
as well as negatively affecting foreign direct investment
and foreign exchange rates.
3. Impaired Ability
by the PRC to Implement Monetary Policy Reforms:
that the PRC’s efforts to continue to reform the country’s
financial system, in part by reducing the generation of
new non-performing loans (“NPLs”), may be impaired
due to increased difficulties faced by the four asset management
companies charged with recovery or disposal of NPLs to repay
loan purchases through the issuance of sovereign-supported
debt. The pricing and marketability of new debt issues may
be adversely affected due to exigencies created by virtue
of pre-existing defaulted claims presently in collection.
Foreign participation in Chinese financial markets may be
discouraged as well, as a direct result of the PRC’s
posture with respect to refusal of payment of government
In addition to
the foregoing, since full faith and credit obligations of
a sovereign issuer are generally held post-Brady Plan restructuring
to be de facto senior to bank debt, it is appropriate at this
time to assign a downgrade to trade credit of the PRC, as
well as to outstanding and future debt obligations of state-owned
enterprises (“SOEs”) of the PRC.1 The relevant historical
fact pattern demonstrates that when the isolationist Chinese
communist government (i.e., the PRC) acceded to political
power over the Chinese mainland and subsequently repudiated
existing external sovereign debt obligations, and then determined
to re-access the international capital markets while ignoring
payment claims arising from valid pre-existing obligations
of the Chinese Government, the probability of future continuity
of payments on present and future-issued obligations may reasonably
be interpolated from the historical fact pattern as embodying
a significant degree of repayment uncertainty which is not
reflected in the current PRC debt rating. 1 Post-1990 Brady
Plan debt restructuring as described in "Appendix A"
of the Salomon Smith Barney Sovereign Credit Risk Analyst's
and continuing refusal by the PRC to pay legally valid obligations
of the Chinese Government, in violation of international law,
represents a form of institutionalized behavior pattern of
the PRC, suggesting the probability that such debt defaults
presaged upon the unwillingness to pay external obligations
may reasonably be expected to recur in the future.
In light of the
persistent intransigence of the PRC with respect to payment
of defaulted external obligations and the continued unwillingness
of the Chinese Government to pay legally valid claims arising
from defaulted sovereign obligations, as well as the potential
financial impact arising from a contingent liability, the
following existing PRC ratings are no longer appropriate:
Agency PRC Long-Term Foreign Currency Credit Rating
Investors Service A2/Stable
Fitch, Inc. A-/Positive
of the Government of the People’s Republic of China with
respect to its continued refusal to pay U.S. citizens’
claims arising from defaulted Chinese government debt obligations
as required under conventions of international law as described
herein and affirmed in the attached legal opinion is neither
consistent with, nor indicative of, an investment-grade sovereign.
In light of such
posture, Sovereign Advisers issues a credit watch for
sovereign debt obligations of the PRC and assigns a downgrade
of the PRC debt rating to sub-investment grade status.
A re-determination and downgrade of the prevailing sovereign
credit rating of the People’s Republic of China is further
warranted by the emerging significance of this issue within
the United States Government, as evidenced by the testimony
presented on October 21, 2003 to the International Relations
Committee of the United States Congress House of Representatives
during hearings conducted on PRC abuses of the international
Congressional testimony may be accessed at:
J. McDonald, Esq.
Drye & Warren LLP
Towers Crescent Drive, Suite 1200
Bondholders Protective Council
Gallows Road, Suite 220