This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

CHINA’s investments in Malaysia are the subject of a new book — China in Malaysia: State-Business Relations and the New Order of Investment Flows — by Prof Edmund Terence Gomez, Prof Emeritus Siew Yean Tham, Dr Ran Li and Dr Kee Cheok Cheong. It is the first book-length study of China’s investments in the region, with in-depth case studies, Gomez tells The Edge.

Gomez is professor of political economy at University of Malaya’s Faculty of Economics and Administration, Tham is visiting senior fellow at ISEAS-Yusof Ishak Institute in Singapore and is based at Universiti Kebangsaan Malaysia, Li is senior lecturer at University of Malaya’s Institute of China Studies and Cheong is senior adviser at University of Malaya’s Asia-Europe Institute. Here are excerpts from the interview.

When we studied these government-linked companies (GLCs), we realised there was something going on in the political system, where we had a strong state with a dominant leader, [then prime minister Datuk Seri] Najib Razak, talking to another dominant leader, [President Xi] Jinping of China. The common factor was that both of these strong states with dominant leaders controlled GLCs.

We had very important projects that caught the imagination of the country such as the East Coast Rail Link (ECRL), which involved relationships between GLCs from Malaysia and state-owned enterprises (SOEs) from China. It was based on negotiations between the two governments, which could then use their various SOEs not only to construct the ECRL but also to finance it.

These state-state links led to new forms of business relations that were very different from public-private partnerships. Now, we were seeing public-public partnerships.

It meant two powerful countries controlling very powerful enterprises could now implement major projects, completely bypassing the private sector. They don’t need private sector investments anymore.

There was a point in time when emerging economies like Malaysia and China needed to go on bended knee to multinational companies and beg them to come and invest, giving them all kinds of incentives. This is not the case anymore. Two leaders will meet, discuss what they want to do and instruct their SOEs: ‘Now go and do it’. They have the financing and the know-how.

Long before all these public-public partnership issues emerged, the government was already talking about bringing greater infrastructure development to underdeveloped states in the peninsula, specifically the east coast states.

Under the East Coast Economic Region [launched in 2007], there was a lot of focus on how to bring the east coast states out [of their economic situation]. At the time, they were already talking about the ECRL.

The ECRL will allow the transfer of products from east coast states to domestic and international markets. Industries could spring up along the railway route because the transport is there right next to them.

There are so many positives from the ECRL that could have emerged, and that is why these governments were very happy. It solved real problems in their respective countries: China wanted its Belt and Road Initiative (BRI) so that it would have the road, rail and port services for its economic needs. The ECRL suited its purposes because Malaysia is very well situated. And Malaysia also solved the problem of regional underdevelopment.

These are all positive things, which the government could make happen, and quickly too. Unfortunately, however, we were not dealing with an open, transparent, accountable government, but one which used the idea of positive outcomes in tandem with rent-seeking.

There were other issues such as the possibility of giving out sub-contracts … to select individuals who were well-connected, again thereby undermining the positive dimensions of the ECRL. So, they could have their cake and eat it too, so to speak.

The nature of the Malaysian economy is highly dependent on foreign direct investments for growth. This is where China comes in, but there’s a story to be told here.

In 2013, two interesting things happened. First, the Barisan Nasional government under Najib thought it was going to win big at the general election because Najib had come out with a whole slew of national development-type policies — the Government Transformation Plan, 10th Malaysia Plan, Economic Transformation Plan, National Key Results Areas and so on.

The government thought it had put in place a lot of measures to bring about equitable development. Najib was also trying to make the argument that there was no need to put so much emphasis on policies such as affirmative action.

He even announced that there would be no more affirmative action and there was a backlash from people like [former premier Tun Dr] Mahathir [Mohamad] and [the Malay rights group] Perkasa, so [Najib changed it into] market-friendly affirmative action. He even came up with a slogan called 1Malaysia to show that he was more inclusive. This was all in response to the [setback faced by BN in the] 2008 general election.

Then, he did badly in the 2013 general election and he changed. Najib brought in an affirmative action plan called the Bumiputera Economic Transformation Programme. He said the GLCs were going to implement the policy. There was no more [talk of] 1Malaysia, it was ‘support the bumiputera agenda’.

The implication of all that is Najib would then be bypassing a very dynamic community in Malaysia. He knew that by pushing that dimension, he would lose out on domestic investments.

Affirmative action plans in Malaysia do stymie domestic investments. This was an admission made by Najib as soon as he came into power. He actually recognised that it is not inspiring investor confidence … it had long been recognised and he tried to redress it, with some problems of course. But now, he had completely reversed it.

When he reversed it, he had a problem: Where are investments going to come from? So he had to look abroad.

This is where things got very interesting for Najib because in 2013, Xi announced the BRI after coming to power. Suddenly, there was a confluence of economic and political interests for both leaders.

That confluence of interests led to a massive inflow of investments from China into Malaysia after 2015 (see table). This meant we could still have national policy development things going on, though not necessarily in the interests of domestic enterprises, including our SMEs (small and medium enterprises), which constitute 98% of our economy.

We say [in the book] that investments were coming in, projects were getting done, but not necessarily along the lines of the national development agenda, promoting the rights of domestic enterprises, which were self-sufficient and could go abroad and compete with the best in the world. In fact, now they couldn’t because they had to deal with a very powerful force — Chinese SOEs.

The Chinese could easily undermine domestic firms too. Domestic firms actually had to say, ‘Thank you, I will move out. I’ll sell off to the Chinese.’ When we asked some of these companies why they were selling off to the Chinese SOEs, they said, ‘We can’t compete.’

That shows a major structural problem in Malaysia. We haven’t invested enough in R&D, again pointing to the policies that we had.

The Chinese SOEs came and said, ‘We’ll buy you out.’ These SMEs were already well into the market. They already had their networks, their supply chains. By buying out these companies, they take over the supply chain, the networks which will take the companies a lot of time to create. So immediately, the Chinese firms will get major inroads into our market.

The fundamental story of the book is — in the short term, we will see so-called development. But in the long term, will we see a situation where domestic firms will lose out appreciably to foreign firms?

There is evidence to suggest that it is happening.

Under the Shared Prosperity Vision, which the Pakatan Harapan government introduced last year, it provided the corporate equity ownership figures that had not been released since 2008. The figures indicated that non-bumiputera enterprises now owned as much corporate equity as in 1970. Corporate equity ownership had fallen behind quite significantly, from close to 40% back to 30%.

The bumiputera share of corporate equity, which had risen to 23% had now fallen to 16%. Bumiputeras and non-bumiputeras were falling behind, but who was gaining? Foreign firms. Up to 2015, they had reached close to 50%. What more now, when the data is very clearly indicating that they are buying out many of our companies, including our public-listed companies?

Will we be dominated again by foreign enterprises?

If our enterprises cannot grow because they are being dominated by very powerful foreign firms, that leaves us at the mercy of these firms. What happens if these foreign firms decide to pack up and leave, which they are quite likely to do? Where does that leave us, especially if we don’t have a vibrant domestic enterprise base, especially among SMEs?

Our GLCs are a key force in the economy, but they are nowhere as dynamic as the SOEs in China. For example, our GLCs have no presence in the industrial sector, the manufacturing sector, of any sort, or the technology sector, unlike the Chinese SOEs.

Although our GLCs are big, they are in sectors like banking and construction. So, if the Chinese move out, we are dead in the water.

Technology and industrial are sectors you must be in, and SMEs are not doing well in these sectors. Where is the growth going to come from? This is what the government must look at carefully.

The volume of R&D by firms is still very low. If you look at domestic R&D as a component of GDP, it is still about 1.2%. There is no way we can grow with that kind of investment in R&D.

It has been a problem for a long time. That speaks to the issue of our public policies.

Why is it that the government has been unable to get companies to invest in R&D? It’s because there is this fear of expropriation. If you become too big, the state is so powerful, it can expropriate these companies. And it has happened in the past. This is the problem in the SME sector. These SMEs are vibrant, entrepreneurial, dynamic but also fearful.

These issues speak to the problem of the nature of the state. Have we resolved the problem of the nature of the state? [The desired situation is] where the state is open, accountable and does not instil fear that it will expropriate companies as they develop. In fact, it would even nurture and support them.

The problem is not that China does not want to teach, they don’t mind. But we don’t seem to have the capacity [to pick up the know-how]. That comes back to the story of the human capital development issue, which again is another long-standing problem related to the issue of education and our curriculum that has not been changed, and the fact that our students have not been trained to deal with these kinds of things.

So, even in terms of human capital, SMEs don’t have it, and they don’t attract bright graduates, who either go to work in multinational companies or large local firms. They don’t work with the domestic small and medium firms, so these firms don’t have the human capital that is skilled enough to learn these technologies.

There were so many structural problems, which were facilitating China’s entry into the economy. This allowed it to move in in a big way. We were more than willing to accept that because it solved a lot of our immediate problems. But this does not in any way help us deal with the long-term problems that we have to resolve.

[New forms of financing is] one of the big issues which we saw that is particularly true of infrastructure projects, which are very expensive. The governments of China and Malaysia own development financial institutions (DFIs). DFIs are not commercial banks; they play the role of financing development.

When you can’t get commercial banks to provide financing, the government can always turn to these DFIs. This is more true of China, not so much Malaysia.

So, if China wants a project to go through, it can get these powerful DFIs to bring forth the finance. There are also Chinese commercial banks that are owned by the state.

This comes back to the issue of ownership and control. If ownership and control is with the government, it can easily use its control over these institutions to ensure that a project is implemented. That can be a good thing because it can ensure that the implementation goes through. But it can be a bad thing if there are issues concerning transparency in the implementation of the project, and that is also coming through here.

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