COLUMN: China is a giant money-sucking black hole

China is a money-sucking black hole that wastes resources and chokes the natural flow of the market-driven global economy.

Here is how it works.

China, the biggest exporter in the world, sells tons of goods abroad. In return, the world gives China money. Then, to the detriment of the global economy, China either hoards this money or wastes it through inefficient use.

Of course, not all the money sent to China is hoarded or wasted. However, enough of it is and because the country is so big, it presents a real problem to the world.

To understand this problem, it helps to look at how money flows in a healthy market-driven system.

The cycle starts when a consumer pays a company to buy its product. With that money, the company spends some, investments some, and saves some. The money it spends and invests goes to other companies (and consumers through salary). These other companies, in turn, go through the same process and move the cycle forward. (As for the money saved, it goes through the cycle at a future date).

However, when money flows to China from Western countries like the United States through the purchase of Chinese goods, not enough of it is returned back to the U.S. private sector.

Why is this so?

China's currency regime is a major reason.

The Chinese government accumulates foreign currencies in order to keep the yuan undervalued. They mostly invest this huge sum of money into the government debt instruments of countries like the United States. So while money is actually flowing back to the U.S., it's coming to the federal government rather than the private sector.

When Westerners complain about China hoarding money, this is a part of what they actually mean, i.e. the Chinese government buying Treasuries instead of efficiently buying the goods and services of American businesses.

When the Chinese government isn't buying Treasuries, they inefficiently deploy capital by subsidizing/sponsoring wasteful domestic infrastructure projects. The private sector and financial system, which are heavily influenced by the government, enable this.

Two famous examples of China's wastefulness is the ghost town of Ordos and the empty New South China Mall. Travelers to China bring many other anecdotal tales of empty buildings. There are also allegations that infrastructures like certain stretches of high-speed rails are impressive feats of engineering, but nonetheless excessive and wasteful. Lastly, the government allegedly subsidizes many companies in favored industries, which takes away resources from other companies that can use it more efficiently.

While it's true that Chinese infrastructure construction in itself already sparked economic booms in commodity-producing countries like Australia, the fact remains that China uses resources (money, hard assets, etc.) inefficiently.

For example, if Australia's raw material exports were used to fuel construction in the U.S. that met genuine private demand, not only would Australia experience the same boom in the construction phase, it would also benefit from future economic activities generated from those constructions.

Contrastingly, if China just builds ghost towns, there will be no future economic benefits to Australia and the rest of the world.

On a philosophical level, China's poor ability to allocate resources efficiently was articulated by Adam Smith in the 18th century when he argued that the 'invisible hand' of the market was best at this job.

Western economies, even though they have their own distortions and problems, have proven Smith right by generally allocating resources better than China does.

China's relative deficiency in this area wasn't really a problem for the global economy 30 years ago. Now, however, it is a problem because China dominates global trade and sucks in a large portion of the world's resources, be it purchasing power or raw commodities.

Moreover, by keeping the yuan undervalued, it artificially props up the competitiveness of Chinese exporters and therefore induces the world to purchase more goods from China. In other words, the country's currency regime contributes to the gigantic size of its money-sucking black hole.

China is already a primary cause of the global recession.

By keep its currency cheap and wasting resources, it drained the real purchasing power of U.S. consumers for over ten years.

U.S. policy-makers responded by keeping interest rates low, which made loans cheap and inflated asset prices, thereby enabling Americans to spend beyond their means.

Excessive borrowing and asset inflation, of course, are unsustainable and eventually triggered the global financial crisis.

U.S. politicians should have addressed the real problem, which is that American businesses are not receiving back the money that American consumers have sunk in China's black hole.

Email Hao Li at hao.li@ibtimes.com