This article first appeared in The Edge Malaysia Weekly on January 29, 2018 - February 4, 2018

OVER the last few years, China has become one of Malaysia’s biggest source of foreign investment with its state-owned and private enterprises investing in some high-profile projects in the country.

Banners in Mandarin flutter at various project sites, from Forest City to Tun Razak Exchange, where Chinese engineers can be seen interacting with their Malaysian counterparts. This ubiquitous presence of Chinese companies and workers in the Malaysian economy has created some unease among the locals.

“The RM10 billion acquisition of Edra Global Energy Bhd by China General Nuclear Power Corp has caused concerns that China is meddling in our domestic politics,” says Lau Zheng Zhou, research and business development director at the Centre for Public Policy Studies (CPPS), which was established by the Asian Strategy & Leadership Institute.

“People are wondering what the Chinese are expecting in return. What about China’s claims in the South China Sea?”

While Chinese companies have been investing in Malaysia for decades now, it was only in late 2012 that their presence began to be felt. That was the year several multibillion-ringgit land deals were signed between Chinese developers and Johor landowners.

As Malaysia increased its rail and road infrastructure development, companies such as China Communications Construction Co Ltd, China Railway Construction Corp Ltd, China Railway Engineering Corp Ltd and China Harbour Engineering Co Ltd became household names in the local construction and engineering industry.

This led to the perception that Chinese companies were crowding out local players and that one day, Malaysian companies would not be able to compete on their own turf.

Is this a misconception or the reality?

“We should look at this issue rationally,” says Lau. “As China’s economy continues to grow, we are bound to see more investment coming out of the country, not only to Malaysia but also the rest of Asean and the countries in its Belt and Road Initiative. We should be looking at the quality of the investments rather than asking about their origins.”

He points out that between 2008 and 2015, investments from China made up only an average of 0.34% of total foreign investments in Malaysia. Singapore, Japan, the US and the UK continued to be the country’s bigger sources of foreign investment.

Nevertheless, between 2008 and 2015, Chinese investments grew at a fast clip of 20% per annum, according to CPPS. In 2016, the figure doubled from that in 2015.

This trend is expected to continue in the coming years as China’s outward investments grow exponentially. As one of the Belt and Road countries, Malaysia is expected to receive more investments from the country. Between 2005 and 2016, it was the 11th largest recipient of Chinese investments, amounting to US$17.23 billion, in the world, and the largest in Southeast Asia.

However, Singapore overtook Malaysia last year, receiving a total of US$13 billion compared with the latter’s US$930 million.

So the question is, should Malaysians worry about Chinese investments in the country?

Lau feels the size of Chinese investments in Malaysia is exaggerated while Ian Neo Chee Hua, secretary general-cum-head of research at the MCA Belt & Road Centre, believes the issue has turned political, driving a wedge between the people and the ruling government.

“The local Chinese community generally welcomes these investments. We notice that SMEs (small and medium enterprises), especially those that focus on the domestic market, have concerns. Due to the cultural gap, other Malaysians are doubtful about Chinese investments here,” he tells The Edge.

Racial and political issues aside, one has to keep in mind that Chinese investments in Malaysia can be grouped into two categories: investments in manufacturing, property development and energy and those in infrastructure development for trade facilitation.

Proponents of Chinese investments in manufacturing and other industries claim that they create jobs for Malaysians and that the country benefits from lower import costs as new industries emerge to cater for the domestic market.

CPPS points out that in the manufacturing industry, Malaysia has become the world’s third largest solar cell producer, after China and Taiwan, after two Chinese companies invested in Penang and Sarawak.

Before, Malaysia had to spend RM1.5 billion per year on importing glass and glass products but after investments by Kibing Glass Group and Xinyi Glass Holdings Ltd, the country has become a glass exporter instead.

“Chinese investments in manufacturing are beneficial to the economy as they create jobs and Malaysian companies will gain knowledge and develop expertise by working with their Chinese counterparts,” says Lau.

According to Prof Dr Yeah Kim Leng, director of economic studies at the Jeffrey Cheah Institute on Southeast Asia, Malaysia’s ability to reap gains from FDI depends on its absorptive capacity — the ability of local firms and Malaysians to learn and adapt.

This capability to absorb and improve upon the services and products resulting from the FDI is critical not only to realise immediate gains in terms of output, employment and income but also to the longer-term prospects of FDI retention and growth in the country, he says.

“While the technology gap with firms in advanced countries remains big in many industries, Chinese firms are rapidly catching up through indigenous technology, R&D and the acquisition of foreign technology.

“This is where the knowledge-sharing and technology transfer between the Chinese and Malaysian joint-venture partners can generate a win-win situation for both countries that are still at the middle-income stage.”

While Chinese investments in economic sectors may have benefited Malaysia in terms of job creation and lower imports, what about the East Coast Rail Line (ECRL), which is essentially a domestic investment funded by soft loans from the Chinese government?

The ECRL, which will eventually link Port Klang on the west coast of Peninsular Malaysia to Kuantan Port and all the way to Tumpat in Kelantan on the east coast, will cost RM55 billion. Proponents of the project say it will open up the east coast, becoming a new industrial hub for Malaysia. The low land cost will attract manufacturers to locate their plants there as connectivity with the west coast improves.

The long-term benefit of better connectivity between the west and east coasts of Peninsular Malaysia will justify the government’s borrowings from the Chinese to finance the project, the experts say.

“Debt in itself is not an issue but the inability to service it is. That is why our government is very careful and has imposed a debt-to-GDP ratio ceiling of 55%. It depends on what you do with the debt.

“If our debt goes towards paying for welfare services à la the EU, then it will become a problem when your GDP growth slows. But if your debt goes towards building industry and creating new jobs, the chances are you will grow a bigger pie and be able to pay off the debt,” says Lau.

However, does the economic needs of the ECRL warrant the high price tag and the need for it to be funded by foreign borrowings? These are valid concerns about foreign investments in this country, including those from China, says Yeah.

“Although some quarters argue that it is cheaper to build now rather than later, deferring such a project until the economic need warrants it or when economic and financial conditions are conducive will be seen to be more prudent than satisfying the country’s limitless ‘wants’,” he says.

In a brief response to The Edge, Prof Dr Jomo Kwame Sundaram of the Institute of Strategic and International Studies Malaysia says the ECRL will never break even, let alone be profitable, without explaining why.

The government already had an outstanding debt of RM687.4 billion as at the third quarter of 2017, according to data from Bank Negara Malaysia. Its current debt level is close to the self-imposed ceiling of 55% of GDP.

Malaysia will be embarking on other big infrastructure projects, which are likely to be funded by debt, such as the Kuala Lumpur-Singapore High-Speed Rail, the Pan Borneo Highway, LRT3 and MRT2 and 3.

If what Jomo says is true, that the ECRL will never break even, will Malaysia have to let ownership of the project go to the Chinese government if the soft loans cannot be serviced?

The proponents of the project think such a situation is unlikely to arise as the economic benefits of the ECRL outweigh the cost based on the expected growth in trade with China and other countries.

Only time will tell if this is the case.

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