Intermediate coporate finance - Research Paper Example

But of late the U.S. has become to a lesser extent reliant on China’s funding of its deficits predominantly as the U.S. classified saving rate has increased and the current account shortage has decreased. However, the mere scale of the U.S. shortage funding need which is approximately $1.6 trillion budget deficit in 2010 and forecast of almost $9 trillion of shortages over the next decade in the markets of bond and currency are delicate (Prasad, 2010). On the other hand an abrupt activity by China to move uncompromisingly out of U.S. dollar designated instruments, or even a declaration to such an extent, would work as a set off around the jumpy market sentiments resulting to a quick plunge in bond prices and the rate of the U.S. dollar.

At the same time China would also be facing huge capital loss since its majority holdings are in the U.S. Treasury market. This would also end up in reduction of the Treasury bond rates due to increase in interest rates or even if the renminbi appreciated in value comparative to the U.S. dollar (Prasad, 2010). Over the past years trade amongst the two economies has seen consistent increase in quantity and China’s foremost export market is US. The exports from China, to the U.S. sprang up from $100 billion in 2000 to $296 billion in 2009, and at the same time the imports increased from $16 billion to $70 billion.

Thus there has been a fixed percentage of export to the US by China which is 21% right through from 1998 to 2006 but this percentage fell to 18 during 2007-2009. On the other hand even though there has been increase in the exports of US to China the percentage still remains below 5 (Prasad and GU, 2009). Many of the spiny consequences in the bilateral relationship amongst these two countries can be described as the growth of the mounting bilateral U.S. trade deficit with China. This shortage sprang up from about $84 billion in 2000 to nearly $227 billion in 2009.

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