China owes the United States approximately $1 trillion in defaulted debt—a staggering figure rooted in a complex historical and legal web few discuss today. This financial obligation dates back to loans issued by the U.S. and the U.K. to the Republic of China (ROC) before 1949, when the ROC was the internationally recognized government. Following the Chinese Civil War and the rise of the People’s Republic of China (PRC) under Mao Zedong, the ROC government fled to Taiwan, creating a unique situation that still echoes through international relations and financial systems.
The PRC, now recognized globally as the official government of China, has refused to acknowledge the debt incurred by the ROC, considering those liabilities outdated and irrelevant. However, a turning point came in 1987 when China made a partial repayment to the United Kingdom during the diplomatic arrangements for the handover of Hong Kong. That act set a critical legal precedent—it was an implicit recognition that China, as the successor state, bears responsibility for these historical debts.
This acknowledgement brings into play two vital international legal principles. The first, pacta sunt servanda, states that agreements must be honored. The second, the successor government doctrine, holds that when a new regime takes over, it inherits the obligations of the previous government. These frameworks strongly support the argument that China remains accountable for the outstanding U.S. claims.
Beijing may attempt to argue that this is “odious debt”—debt accrued by a previous regime for purposes not benefiting the general population. However, this position is undermined by the developmental nature of the loans and China’s own partial repayment in the past.
Despite its legitimacy, collecting sovereign debt from a major power like China is extraordinarily difficult. China holds over $850 billion in U.S. Treasury securities, giving it counter-leverage. Any aggressive attempt by the U.S. to demand repayment could result in financial retaliation, such as the mass sale of U.S. bonds, potentially destabilizing markets.
Yet this unresolved debt offers a unique opportunity. Some analysts suggest using it as a tool to offset America’s obligations to China, such as applying the defaulted amount against U.S. interest payments or Treasury debt held by China. With Beijing’s foreign exchange reserves surpassing $3 trillion, repayment is financially feasible—but politically sensitive.
Crucially, the U.S. holds strong negotiation leverage, while China’s hands are increasingly tied. The legal precedent set in 1987 makes it difficult for China to deny the legitimacy of the debt, particularly in international forums where the U.S. could assert this claim to challenge Beijing’s credibility. By framing the debt as a valid counterbalance to Chinese-held U.S. bonds, Washington weakens Beijing’s influence as a creditor and repositions itself from a debtor to a claimant. This not only reshapes the balance of financial power but also opens a path for strategic use of the debt as a bargaining chip—whether in trade talks, intellectual property disputes, or broader geopolitical negotiations.
Furthermore, raising global awareness of China’s default could subtly erode its financial reputation, making international investors more cautious and increasing its borrowing costs. While Europe has largely avoided the topic, likely to preserve trade ties and due to its limited exposure to the original loans, the U.S. has more freedom to surface this issue when the timing benefits its strategic objectives.
For Washington, this forgotten $1 trillion is not just historical baggage—it is a potent, underutilized asset that, if handled with diplomatic precision, can shift the dynamics of power and influence between two of the world’s largest economies.