London, 18 August 2011

China’s official FX reserves hit a stunning USD 3.2 tr in July. Beijing will have no choice but to accumulate US government debt for the foreseeable future. Under the IMF baseline scenario, China could end up holding close to 1/3 of all US treasuries (held by the public), according to Deutsche Bank Research.

But even under less “aggressive” scenarios, Beijing’s exposure to Washington and Washington’s reliance on Beijing will continue to grow – possible Chinese measures aimed at limiting holdings of US debt notwithstanding, say Deutsche. "The financial stakes in Sino-US relations will be increasing for the foreseeable future – raising the bilateral economic and political stakes between the world’s two largest economies."

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