Global Imbalances: The Fall of Wal-Mart and the Rise of Rural China

As the Financial Times reports it:

The US administration, with support from Europe, is seeking to reach agreement on a new framework for tackling global economic imbalances at next week’s G20 summit in Pittsburgh.

Or does it really want to?

This ugly expression of "global imbalances" coined by some technocrats at the IMF in the early 2K years and subsequently endorsed by academics and policymakers all around the world, refers to the nexus of economic phenomena that have been building up with the advent of globalization and the liberalization of financial markets over the last 30 years.

Basically it is all about China exporting cheap goods and cheap credit to the developed world to the benefit of the average American family and to the even greater benefit of Wal-Mart (WMT) shareholders reaping the benefits of its high volume and low margin business model.

What went wrong with this model? Well, the fact that the Chinese factory workers in Shenzen and Shanghai - many of them migrants from the poor rural areas - got only a very small chunk of this pie. Instead, the Central bank of China accumulated huge foreign exchange reserves that were invested in low yielding US Treasuries, thus contributing to very low borrowing costs in the United States, which in turn fueled even more the consumption frenzy of the average American family and the real estate bubble that led to the subprime catastrophe.

“We hope to reach agreement on a framework for balanced growth, for agreeing on how to address the imbalances that led to this crisis and on some process for holding each other accountable,” Michael Froman, deputy national security adviser for international economics told reporters.

This sounds more like wishful thinking. It is an illusion to think that these so-called "global imbalances" can be reversed overnight. In fact, it would bring more harm than good.

This political chitchat misses the silent revolution that is currently taking place in the most remote parts of rural China. This silent revolution is bringing millions of farmers out of poverty through a better recognition of their property rights on the land they are established on. As the Journal reports it, more than half of the income gained by Chinese farmers is now derived from other activities than Agriculture, through wages and rent revenues, up from almost nothing 20 years ago.

The solution to global imbalances will not come from the G20 Summit in Pittsburgh next week, but from Anhui, Sichuan, Hebei and other rural areas in China. The rise of the Chinese rural consumer, which still accounts for 50% of the 1.3 billion Chinese population, is the fastest way for China to consume more and save less.

The Wal-Mart business model may see its days are numbered. Unless Wal-Mart accelerates its international expansion strategy with one obvious target for that: rural China.

Disclosure: No positions

Comments

[mkreisel:]

If China's manufacturing costs go up, Wal-Mart will just source more stuffs from India, Indonesia, Mexico, Thailand, Vietnam, and even Africa. As long as Wal-Mart enjoys its cost advantage vs other retailers, I fail to see how it would "fall".

Sep 17 10:34 PM

[LKofEnglish:]

doesnt' wal mart sell to the chinese too?

Sep 17 11:17 PM

[datadave:]

This a good analysis of Chinese culture but perhaps ignores the elites there that don't really want to rural Chinese to have the option of owning their own land. Good jobs have to be there in order for the people to not need to migrate to the larger cities for work. Since companies go to where they can profit and be close to shipping they will stay near the Pacific coast and not likely move inland unless China increases their nation's roads and rails even more. They are but still not enough to 'free' the inland from backwardness and joblessness. In the USA, we can't even do that so why should the Chinese. Many rural Americans are having a hard time finding work as it is the nature of being away from manufacturing and service centers. (e.g. Adirondacks of NY, North Dakota, Appalachians )

Sep 17 11:57 PM

[JeffDB:]

I think the global imbalances in trade with China are ultimately caused in very large measure by artificially keeping the value below its true value and not allowing it to float against other currencies to reach equilibrium.

As it stands, it would seem to me that the Chinese government will continue to rake in most of the reserves and the trade imbalances will continue irrespective of whether some of the benefits trickle down to the rural Chinese farmers.

Sep 18 12:48 AM

[chewelahboy:]

Is not income from "property" also significant and growing source of income for Corporations in China as well? I don't quite see a dichotomy.

Sep 18 01:39 AM

[U338129:]

Exactly. The title of this article is ridiculous...."The Fall of Wal-Mart." Look (as Obama loves to say), it doesn't matter where or who creates the crap that Wal-Mart can pawn off on customers. If the Chinese don't want to do it on the cheap then I'm sure Wal-Mart can find cheaper labor somewhere else. The fact is that nobody has the power at this point in time to compete head-on with Wal-Mart. Even the likes of KO, PG, and JNJ bow down to Wal-Mart because they know you simply cannot compete with the distribution system and foot traffic it has. Say what you want and put out articles with questionable titles, but Wal-Mart is far from "falling."


On Sep 17 10:34 PM mkreisel wrote:

> If China's manufacturing costs go up, Wal-Mart will just source more
> stuffs from India, Indonesia, Mexico, Thailand, Vietnam, and even
> Africa. As long as Wal-Mart enjoys its cost advantage vs other retailers,
> I fail to see how it would "fall".

Sep 18 10:55 AM

[einstein p ...:]

China will build a "middle class" of 250M consumers within their own domestic markets to negate their dependence on Walmart and the US consumer, as well as develop stronger trading relations with India and other emerging economies.

Walmart, on the other hand, has made a strong move into producing "sustainable" goods, which would require such goods to be manufactured here in the United States. Food & Beverage, home cleaning products, composting, personal care, and many other products that do not require a great deal of hand labor can be manufactured in this country. Very few companies have the manufacturing and logistics expertise to coordinate this type of venture, let alone the funds ---- and I believe this is exactly what Walmart intends to do with the full support of the government.

Such a move would create millions of new green collar jobs. It's not just foreign oil that America needs to wean off of in order to regain our independence ---- we need to re-establish our manufacturing base.

I wouldn't count Walmart out just yet. In fact, I rate the company a strong buy at fifty dollars a share.

Sep 19 10:58 AM