In 2000 China owned around 2% ($60bn) of outstanding US debt. By July 2013 it was around 11% ($1.3tn) plus around $700bn in US agency debt like Freddy Mac and Fannie Mae. Yale’s Stephen Roach thinks that the codependency may become unsustainable.

China does not buy Treasuries out of benevolence, or because it looks to America as a shining example of wealth and prosperity. It certainly is not attracted by the return and seemingly riskless security of US government paper. China buys Treasuries because they suit its currency policy and the export-led growth that it has relied on over the past 33 years. As a surplus saver, China has run large current-account surpluses since 1994, accumulating a massive portfolio of foreign-exchange reserves that now stands at almost $3.7 trillion.

Stephen argues that the time may soon come when the Chinese will cease or reduce purchases and that America will be in for a big shock. America relies on foreign investors for funding and have possibly become over confident that their debt will continue to be take up as it is.

When queried about America’s dependence on foreign lenders, they often smugly retort, “Where else would they go?” I have heard that line many times when I have testified before the US Congress.

He goes on to say that the recent US fiscal problems may be the straw that breaks the camels back. While China is trying to rebalance it’s economy it may mean that it will have less surplus with which to purchase US debt.

The real damage to the US over the budget/debt debacle may already be done in terms of foreign investors deciding that the political brinkmanship may be too much to bear in the future. The US still holds that “Where else would they go” factor but they might live to regret not reading the warning signs if they come.