Malaysia’s problem: How to cut a better economic deal with China

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Malaysian Prime Minister Mahathir Mohamad answers questions during the international conference "The Future of Asia" in Tokyo on June 11, 2018. / AFP

Malaysian Prime Minister Mahathir Mohamad is pushing back against China’s dominance in the economy, stalling billions of dollars of contracts as he tries to renegotiate them.

He’s heading to China in August — specific dates haven’t been disclosed yet — to discuss those projects and try to win deals that he says should be more favorable to Malaysia.

China has $34 billion worth of infrastructure projects underway in Malaysia negotiated by the previous government of ousted leader Najib Razak, deals that Mahathir said favored Chinese investors over the Malaysian economy. Among his concerns are the large sums that the government has borrowed from China and contractors that use Chinese labor and equipment.

Earlier this month, Malaysia’s government suspended the East Coast Rail Link, which was being built by China Communications Construction Co. with an estimated price tag of 81 billion ringgit ($20 billion). Two energy pipeline projects were also stalled.

Mahathir’s move comes against the backdrop of growing disquiet in Southeast Asia about China’s spreading influence in the region. China’s multi-billion dollar Belt & Road Initiative to build roads, railways and ports is stoking fears of ballooning debt in poor countries like Myanmar and Laos. China’s actions in the South China Sea are also a source of tension.

‘Nationalistic Stance’
Malaysia has been one of the region’s biggest beneficiaries of Chinese investment in the 15 years between Mahathir’s first and latest stint as leader, while economic links in the two countries from trade to tourism have strengthened.

“We expect some negative impact on future Chinese-related investments in Malaysia due to PM Mahathir’s nationalistic stance with regard to investment,” said Chua Han Teng, head of Asia Pacific country risk at BMI Research.

“However, we expect a compromise to mitigate the effect, with Malaysia unwilling to antagonize an important trade partner and China likely to prioritize its ambitious Belt and Road Initiative, of which projects in Malaysia are a key part,” he said.

Here’s a look at how China’s economic links with Malaysia have evolved in recent years:

1. Trade
Malaysia is China’s biggest trading partner in Southeast Asia after Vietnam, with total trade of $92.4 billion last year. In 2003, when Mahathir ended his first period as prime minister, the figure was less than a quarter of that.

Malaysia is one of the few economies in Southeast Asia to run a trade surplus with China, exporting everything from electronics and palm oil to liquefied petroleum gas. Last year, Malaysia exported $54.4 billion to China, or about 18 percent of its total shipments. In 2003, that figure was just $14 billion.

Malaysia imports electrical products, machinery and equipment from China.

2. Investment
Official data shows Chinese foreign direct investment into Malaysia surged more than 700 percent in the past decade to 9.9 billion ringgit last year, a far bigger increase than any other source country.

The inflow has raised concerns among Malaysians over sovereignty, indebtedness and the risk of creating white elephant projects.

“Both Dr Mahathir and the China side look at the definitions of investments from their own experience and perspective and therefore differently,” said Oh Ei Sun, a senior adviser for international affairs at the Asian Strategy and Leadership Institute in Kuala Lumpur. “It is important for both sides to iron out their difference in preferences and expectations.”

3. Tourism
Chinese tourists are now the third-largest group of visitors to Malaysia after Singaporeans and Indonesians, lured by sandy beaches, a shared culture in a country where a quarter of the population are ethnically Chinese, and a love of the pungent durian fruits.

That growth has underpinned a tourism industry that now makes up about 15 percent of gross domestic product. Total tourism receipts in Malaysia climbed 54 percent in the past decade to 82.1 billion ringgit in 2017.

4. Immigration
Chinese nationals were the largest group of participants in the state-run Malaysia My Second Home program, an international residency plan allowing wealthy foreigners to live in the Southeast Asian nation on a long-stay visa. Chinese citizens accounted for almost 30 percent of successful applicants since the program was launched in 2002.

5. Property
The increase in Chinese migration has helped underpin property demand in Malaysia, especially in the southern city of Johor Bahru, which borders Singapore, and in Penang and Melaka states, according to Knight Frank LLP consultants.

For Chinese investors, Malaysia is a cheaper alternative to real-estate markets in Australia, Hong Kong and Singapore. What also counts in Malaysia’s favor is a lower entry cost for property and cultural ties that make food and language familiar to Chinese buyers.

China’s Xiamen University also became the first one in the country to open an overseas campus, which was set up outside of Kuala Lumpur with the aim of boosting ties between Chinese and Malaysian students and academics. — Bloomberg