As sure as God made those sour little things, the Chinese are manipulating their currency, which makes it all the more puzzling when the Justice Department announced yesterday that China was not, in fact, guilty.  Only lawyers could get so side-tracked by trees that they cannot see the forest.  Economists can simply see the trade gap between China and the U.S. last year approached $300 billion and immediately recognize the Chinese are guilty.

While there may be some political imperative to deny the obvious, we should also understand the Chinese government is obsessive about internal tranquility.  Their greatest fear is street riots, like we saw during the “Arab Spring” this year in North Africa.  However, as rich as China is, they do not have the means to buy tranquility from their people, like the House of Saud in Saudi Arabia does.  The Chinese government has to provide jobs instead.  To do this, they must insure their factories can sell the goods produced.  To do this, they must insure their products are cheap.  To do this, they must keep their currency cheap.  To do this, they buy U.S. assets, like Treasury bonds.

Don’t look for much change in this . . . but there is change, and the value of their currency has been inching up slowing.  One reason is international pressure to do so.  Another reason is that the Chinese government has wisely become concerned about lending more money to a country as profligate as the U.S. 

It was also revealed this week that the Chinese have been buying so much land in Latin America that legislatures are considering some bans or limitations, especially in Brazil.  Thus, there is less money flowing into U.S. Treasury bonds.

Often, people fret that the Chinese will just “dump” their $900 billion in U.S. Treasury bonds to intentionally create a crash.  That would easily be the most stupid investment move in financial history, as they would lose enormously.  Plus, under Quantitative Easing, the Fed could simply buy all those bonds.  It is a baseless fear.