China may own as much as 20 per cent of all Australian Government debt according to big Canadian investment bank RBC.

Collating numbers released in the IMF's quarterly update on foreign exchange reserves, RBC's Sydney-based fixed income strategist Michael Turner said it appeared China held around $130 billion of the $730 billion Australian Government and quasi-government bonds in the market.

The IMF update implied around 3.5 per cent of China's holdings in foreign reserves was denominated in Australian dollars, much higher than the 2 per cent the fixed income market had assumed.

"This is well within the bounds of believability and underscores the importance of China's investment in Australian dollar fixed income," Mr Turner said.

On RBC's analysis, China holds around a third of the $400 billion worth of Commonwealth Government Securities, semi-government bonds and sub-sovereign bonds held offshore.

However that investment now appears likely to unwind as China, faced with growing economic problems at home, starts to liquidate its $US3.7 trillion worth of foreign reserves.

Dollar and budget under pressure as China unwinds investments

That unwinding has potential to not only push the dollar lower but put the budget under increased pressure as borrowing costs rise.

"Given its [China's] reserves have begun to shrink, a key source of demand for Australian dollar paper is likely to have been curtailed," Mr Turner wrote in a note to clients.

RBC, which has a large and influential presence in the global fixed income market, argued as the big institutional investors were unlikely to pick up the slack, there would be upward pressure on Australian bond yields and downward pressure on the Australian dollar.

"In this regard, unless supply of Australian dollar fixed income slows markedly — which seems unlikely given the state of the federal budget — pressure will remain for the price to clear at either a higher yield or lower exchange rate, or some combination of the two," Mr Turner said.

In recent years, the federal budget has been helped to a large degree by the low yield environment which has kept a lid on borrowing costs and moderated the deficit.

A rise in government debt yields is not exactly the news new Treasurer Scott Morrison would welcome.

Currently the Australian Office of Financial Management (AOFM) needs to borrow around $70 billion a year to cover maturing government debt as well as a federal budget deficit which is forecast to be around $25 billion next year.