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Wal-Mart (NYSE: WMT  ) recently unveiled a new ad campaign: "Low Prices. Every Day. On Everything." But "Rising Prices. Every Day. On Everything." might more accurately describe Wal-Mart's price policy if the flow of Chinese goods dries up. 

A perfect couple?
As you probably know, a substantial portion of the products sold in Wal-Mart come from China. A strong dollar relative to the Chinese yuan allows Wal-Mart, and many other retailers, to purchase Chinese products on the cheap and pass the savings on to the American consumer.

A perfect marriage, right? Americans are happy because we can go to Wal-Mart and buy a waffle iron for 10 bucks. And the Chinese are happy because making the products we consume creates jobs. But this marriage is on the rocks because it was never built on a solid foundation in the first place.

A possible decouple?
The Chinese intentionally devalue the yuan in order to maintain an export economy. Some economists claim this manipulation artificially depresses the value of the yuan by as much as 40%. The problem is that devaluing the yuan is creating inflation -- thus causing China to reconsider its monetary stance.

A reversal in monetary policy could result in fewer cheap Chinese products for American consumers. The big retailers seem to be preparing for this.

Wal-Mart, Best Buy (NYSE: BBY  ) , and Target (NYSE: TGT  ) are shifting from the big-box model into smaller locations.  But it might be too little too late. A potential situation in which big retail is stuck with excess floor space and decreasing volume is feasible if China pulls the plug on the dollar peg. Internet retailers like (Nasdaq: AMZN  ) will likely be in a stronger position to weather the storm.

The bottom line
For now, China continues to supply America with an abundance of low-priced products, but a change in China's monetary policy could lead to rising prices for American consumers.   

Fool contributor Adam J. Crawford does not own shares in any company mentioned in this article. The Motley Fool owns shares of Best Buy and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and Wal-Mart Stores, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On October 06, 2011, at 5:47 PM, arianweneverett wrote:

    Yes, there would be pain at first, but at the same time, manufacturers might see the value of American labor to make American products, particularly products that require a lot of money and effort to ship. There was definitely pain when jobs went overseas, so there will be pain bringing them back, but its the difference between the pain of a cancerous tumor eating away at you and the pain of childbirth. In the end you get a baby with one, the other leaves you dead or scarred for life.

  • Report this Comment On October 07, 2011, at 3:07 AM, Omniblender wrote:

    we are sitting already on shaky ground. If we pulled the plug on China, of course China is going to get hurt big time. And let's not forget, even manufacturers that already are claiming "USA-MADE" production status import most of their components from China.

    China is also cornering the market in rare earth magnets, the very important ingredient to a successful and competitive energy alternative.

    And it is not llike the USA has never artificially manipulated and under-valued its dollar on purpose. All the QE's blasted into the world... Need I say more?

    When it comes to the US, we are above the law and point fingers at others. This Chinese Yuan "under-valuing" allegation is serious, and one with severe political challenges. Are we prepared to piss off China? I always thought it is actually good that China was pegging the Yuan to the Dollar

  • Report this Comment On October 10, 2011, at 8:47 PM, MHedgeFundTrader wrote:

    Any doubts that China’s Yuan is a huge screaming buy should have been dispelled when news came out that it had displaced Germany as the world’s largest exporter.

    The Middle Kingdom shipped $1.2 trillion in goods in 2009, compared to only $1.1 trillion for The Fatherland. The US has not held the top spot since 2003. China’s surging exports of electrical machinery, power generation equipment, clothes, and steel were a major contributor. German exports were mired down by lackluster economic recovery in the EC, which has also been a major factor behind the weak euro. Sales of luxury Mercedes and BMW cars, machinery, and chemicals have plummeted.

    Eight back-to-back interest rate rises for the Yuan, and a constant snugging of bank reserve requirements by the People’s Bank of China, have stiffened the backbone of the Middle Kingdom’s currency even further. That is the price of allowing the Federal Reserve to set China’s monetary policy via a fixed Yuan exchange rate. It is certain that Obama’s stimulus program is reviving China’s economy more than our own.

    The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid-nineties, it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams.

    There is absolutely no way that the fixed rate regime can continue, and there are only two possible outcomes. An artificially low Yuan has to eventually cause the country’s inflation rate to explode. Or a future global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a revaluation.

    Of course timing is everything. It’s tough to know how many sticks it takes to break a camel’s back. Talk to senior officials at the People’s Bank of China, and they’ll tell you they still need a weak currency to develop their impoverished economy. Per capita income is still at only $6,000, less than a tenth of that of the US. But that is up a lot from a mere $100 in 1978.

    Talk to senior US Treasury officials, and they’ll tell you they are amazed that the Chinese peg has lasted this long. How many exports will it take to break it? $1.5 trillion, $2 trillion, $2.5 trillion? It’s anyone’s guess.

    One thing is certain. A free floating Yuan would be at least 50% higher than it is today, and possibly 100%. In fact, the desire to prevent foreign hedge funds from making a killing in the market is a not a small element in Beijing’s thinking.

    The Chinese Central bank governor, Zhou Xiaochuan, says he won’t entertain a revaluation for the foreseeable future. The Americans say they need it tomorrow. To me that means about six months. Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 3%-4% annual revaluation they are thought to tolerate. Double that with margin, and your yield rises to 6%-10%, not bad in this low yielding world. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills.

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