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Malaysia’s priority is to manage, not stop, China’s investments

Eyebrows were raised when the South China Morning Post recently claimed that mainland Chinese are migrating to Malaysia “by the thousands”.

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Eyebrows were raised when the South China Morning Post recently claimed that mainland Chinese are migrating to Malaysia “by the thousands”.

The report stated that, last year alone, more than 1,000 mainland Chinese had made use of the Malaysia My Second Home (MM2H) programme to migrate there. Between 2002 and last year, a total of 31,732 applications for the scheme were approved, and 7,967 of these were from China.

This means that, since it was started, a dragon’s share — 25 per cent — of the migrants have been from China. China’s increasing presence in Malaysia is not just represented by recent migration. There is a lot happening on the economic front too.

When Prime Minister Najib Razak visited China in November last year, Malaysia signed 14 memorandums of understanding (MOUs) with Chinese companies worth a total of RM143.64 billion (S$46.3 billion). Mr Najib visited China again in May this year, and another nine MOUs worth RM30 billion were signed.

The types of investment are diverse and they are spread throughout the country. More recently, it was announced that Zhejiang Geely Holding Group would buy 49.9 per cent of Malaysia’s national carmaker Proton from DRB-Hicom.

Not a new relationship

A report by Australian investment analysis firm Investorist stated that Malaysia is China’s sixth-most-preferred property investment country, sharing the spot with Singapore.

Malaysia’s economic relationship with China is not new.

Through the Association of South-east Asian Nations (Asean), it has been enjoying a growing relationship with Beijing for quite some time, especially after the Asean-China Free Trade Agreement (ACFTA) came into force in 2010.

Beijing has also taken steps to enhance the relationship by establishing the China-Asean Investment Cooperation Fund in 2013. And their three policy banks — the China Development Bank, the China Eximbank and the Agricultural Development Bank of China — whose role is to support the Chinese government’s policy objectives, have also been actively channelling funds into projects in Asean.

In its early days, the ACFTA was already the largest free trade area in the world, with a combined population of 1.94 billion and combined gross domestic product of more than US$9 trillion (S$12.5 trillion).

Today, as China pursues its One Belt, One Road agenda, the flow of money is growing, with Malaysia recording an increase in Chinese investments of 1,064 per cent from 2012 to 2015.

Opening a country’s economy to investors more often than not creates economic growth that benefits the population as a whole. This has been shown to be the case time after time by many studies.

Thus, the arrival of more investments from China could certainly produce a positive impact for Malaysia if handled correctly. Nevertheless, the volume, speed and style with which this has happened have raised questions.

One issue that has been raised is whether the influx of funds from China is a real investment or just a long-term soft loan.

In some of the recently announced projects, the Chinese government, through their state arm, provides financing to special purpose vehicles created by the Malaysian government on the understanding that the top-tier contractor would be a Chinese company.

Upon completion of the project, the Malaysian entity is still liable to pay back the loan with interest. Some of the loans are also guaranteed by the Malaysian government, which means there is very minimal risk on China’s part.

The biggest example is the East Coast Railway Line (ECRL). State-owned China Eximbank will provide RM55 billion for the project. Malaysia will start repayments only after seven years, when the construction is expected to be completed, and over a period of 20 years.

The Malaysian government will act as guarantor to Malaysia Rail Link Sdn Bhd, a special purpose vehicle created by the Malaysian government to receive the soft loan and oversee the delivery. However, it has already been announced that the main contractor tasked with constructing the ECRL is another Chinese state-owned enterprise, the China Communication Construction Company (CCCC).

There is a requirement that CCCC must subcontract some portions to local companies, but the bigger picture remains, in which Malaysia borrows money from China and will immediately use a large sum of that money to pay a Chinese company.

After seven years, Malaysia will still need to pay back the loan plus interest, again, to China.

Not only does China get back a substantial portion of its money immediately in the form of payment for work done by their state-owned enterprise CCCC, they will also get more money when repayments start, with interest. Ultimately, over the long term, there is still an outflow of funds from Malaysia to China.

This will occur even if the ECRL is not profitable, because the risks and the liabilities are borne by Malaysian taxpayers through a government guarantee of the loan.

Venezuela provides a good comparison. China gave Venezuela a soft loan of US$63 billion between 2007 to 2014, and the repayment was supposed to be with oil. When the price of oil more than halved over that period, Venezuela’s repayment costs doubled. China refused to renegotiate the terms of what was supposed to be a soft loan, leading a commentator to say “Venezuela’s road to disaster is littered with Chinese cash”.

Wither local firms?

Will locals benefits? There have also been questions about the trickle-down benefits to local SMEs. Before China’s ascendance, it was common for Malaysia to issue contracts to Western companies that subsequently subcontract to and source from local companies, thereby generating a trickle-down effect — creating jobs and encouraging technology transfer to Malaysia.

But now there are anecdotal complaints from Malaysian SMEs that Chinese companies procure almost everything from China, sidelining local firms.

This concern does have a basis. A review on Chinese investment in Africa found that Chinese investors hardly create any linkages to the local economy because they source directly from mainland China.

Projects there are usually carried out by Chinese state-owned enterprises which often utilise large amounts of Chinese manpower and materials, shutting out locals from thousands of jobs in projects carried out in Zambia, Ghana, South Africa, Nigeria, Ethiopia and Sudan.

With SMEs contributing 36 per cent to Malaysia’s national GDP, 97 per cent of Malaysian businesses being SMEs, and SMEs providing 65 per cent of the country’s employment, this is an issue that cannot be ignored. Are Malaysian SMEs getting a fair chance to bid for a slice of the pie from Chinese investments? Are there sufficient steps to ensure that not all funds flow out from Malaysia to China, bypassing local players?

Over the past several decades, it had been common for Western liberal democratic economies to bundle up trade with the requirement for Malaysia to enhance domestic governance.

But China has shown no sign of being interested in coupling the growing economic relationship with the promotion of democracy and good governance. The concern therefore is that Malaysia will in fact regress in these fields.

Again, the ECRL provides a good example of how standards have been lowered in the issuance of contracts, ignoring Malaysia’s previously-stated desire to employ competitive bidding when choosing contractors.

The ECRL contract has already been given to CCCC, through direct negotiation, without any open tender. No other company was given the chance to put in a bid, making it impossible to ascertain if CCCC provides the best value for money. The same applies to almost all projects announced thus far. The deals were announced as a fait accompli.

Some quarters have expressed concerns that China may export communism into Malaysia. But this is misguided, as communism in the Leninist-Marxist sense is no longer in China’s driving seat.

The real concern should be on how China is showing that economic growth can be achieved without the need to strengthen liberal democracy or respecting human rights.

This can have a real impact on the fate of liberal democracy and human rights in Malaysia. As argued by Columbia University’s Professor of Political Science Andrew Nathan: “Beijing’s pragmatic efforts to protect its regime and pursue its interests abroad have a negative impact on the fate of democracy … China encourages authoritarian regimes elsewhere by the power of example.”

Authoritarian capitalism?

The rise of China’s economic power shows to Malaysia, and any other country for that matter, that it is possible to create economic growth without extending political and social freedoms to citizens, while at the same time strengthening one party rule.

This is what can be understood from Australia National University’s Professor Evelyn Goh’s comment that China shows there is an “alternative path of maintaining a capitalist economy without concomitant political liberalisation”.

Prof Goh added that many countries now “look to China as an important model for authoritarian capitalism”.

While the concerns are many and often valid, it is futile to think that the influx of Chinese money into Malaysia can be stemmed. Nor should it be.

The investments themselves are not necessarily a problem, for China’s new and dominant role in the world is the new normal, especially at a time when the United States is becoming more inward-looking.

If managed properly, this new normal can be a positive catalyst for Malaysia’s growth.

The key is to acknowledge the issues and concerns, and then to devise steps to tackle them while staying committed to enhancing good governance. China will continue to pursue investments, as they have their own geopolitical objectives and an overcapacity problem to address at home.

Thus, while Malaysia should be open to China’s funds, it is Malaysia that needs to remain committed to the pursuit of a rules-based, competitive and transparent economic system.

Malaysia has already stated the desire to improve governance in various policy documents such as the New Economic Model and the Economic Transformation Programme. These need to be followed through, especially when dealing with an investor like China.

The responsibility to ensure good governance in Malaysia lies with the Malaysian government and the Malaysian people, not China.

The question is whether the current Malaysian administration sees the rise of China as a motivator to pursue good governance, transparency and liberal democracy, or as an opportunity to adopt authoritarian capitalism with a view to strengthen one-party rule, especially at a time when their grip on power is loosening.

With all the problems besetting the current Malaysian administration, it is not difficult to imagine Malaysia evolving in the wrong illiberal direction.


Mr Wan Saiful Wan Jan is Visiting Senior Fellow at ISEAS-Yusof Ishak Institute. This is adapted from a longer piece which first appeared in ISEAS Perspective.

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