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 Amazon.com (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 Amazon.com 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.
