Cover Story: China deals: Boon or bane?



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This article first appeared in The Edge Malaysia Weekly, on December 12 - 18, 2016.

 

MORE Malaysians, including local-born Chinese, are keeping a close eye on the country’s recent dealings with China, although the two nations have had diplomatic ties for over 40 years.

In the 1970s, when most countries were turning their back on China, Malaysia was one of the few that established a diplomatic relationship with the communist nation, whose gross domestic product was below US$200 billion then.

When China’s former premier Deng Xiaoping adopted economic liberalisation policies, many Malaysians joined the rush to invest in the vast mainland to tap the big pool of cheap labour and the rising affluence there.

However, the rise of China as an economic superpower now has caused uneasiness in the world. Some perceive the Middle Kingdom’s aggressiveness in providing financial aid to countries in Southeast Asia to build infrastructure as more of a military strategic move to gain a tighter grip on the region than facilitating development and bilateral trade.

This sense of disquiet was felt in Malaysia when Prime Minister Datuk Seri Naib Razak brought back RM144 billion worth of deals from his recent visit to China. They were met with cool response at home despite the fact that the agreements will drive economic growth — something that Malaysia needs to propel itself to high-income nation status in the face of declining foreign direct investment from the West.

One of the agreements signed involves the East Coast Rail Link (ECRL) project. China is offering Malaysia a RM55 billion soft loan to build the railway track from Port Klang to Kuantan Port.

The debate on the economic benefits of the mega rail project aside, the Chinese government’s generosity has also made many Malaysians wary of what the government might have signed away in return for the financing.

Interestingly, the engineering procurement contract granted to China Communications Construction (CCC) to build the ECRL is RM46 billion — RM9 billion less than the value the government announced to the public.

Prior to this, China General Nuclear Power Corp (CGN Power) came as a lifesaver to help ease 1Malaysia Development Bhd’s (1MDB) financial woes. In November last year, the Chinese power giant paid RM9.83 billion cash to buy over all the power assets owned by the government-owned strategic investment fund, which had failed to list its power arm on time to raise fresh capital to meet its debt obligations. CGN Power also assumed 1MDB’s RM6.8 billion debt.

A month later, China’s construction giant, China Railway Engineering Corp (CREC), formed a joint-venture company — IWH-CREC — to take over a 60% stake in the Bandar Malaysia project from 1MDB for RM7.41 billion. The deal valued the 486 acres of land at RM12.35 billion (see story on Page 71).

CREC owns a 40% stake in the JV while Iskandar Waterfront Holdings Sdn Bhd (IWH), which is controlled by business tycoon Tan Sri Lim Kang Hoo, owns 60%. The Sultan of Johor holds a 40% stake in IWH and Lim, 60%.

The sale was timely for the cash-strapped 1MDB as the creditors were knocking on its door.

The two asset sales reduced 1MDB’s debts substantially.

Shortly after IWH-CREC bought into the Bandar Malaysia project, the government announced that the high-speed rail (HSR), which will ply between Singapore and Kuala Lumpur, would have its terminal in Bandar Malaysia. It also realigned the mass rapid transit Line 2 so that it passed the site — a move to make Bandar Malaysia a transport hub for Greater Kuala Lumpur.

China, which has been promoting its rail technology to the world, is keen on building the HSR as well. Its infrastructure giants — CREC, CCC and China Railway Construction Corp (CRCC) — have set their sights on the rail project.

China is not the only nation keen on building the HSR. Japan, South Korea and European countries such as Germany, Spain and France, also want a piece of the action.

 

Malaysia’s prime location a draw

China has told the world that building rail infrastructure is in line with its “One Belt, One Road” diplomatic policy. Among the countries in Southeast Asia, Malaysia is probably the one with the best strategic location in the eyes of China.

Besides Vietnam, Kuantan is the nearest port to China from this side of Asean; shipping time to south China is only three days. Guangxi Beibu Gulf International Port Group owns 40% of Kuantan Port. Also, the long coastline of Sabah and Sarawak facing China belongs to Malaysia.

The bulk of China’s energy supply, namely crude oil and liquefied natural gas, is transported along the Malacca Straits. It is not hard to fathom the rationale for China to want to build a port in Melaka, where Admiral Zheng He or Cheng Ho had arrived in the 15th century.

The RM8 billion port project will be undertaken by little-known KAJ Development Sdn Bhd with three China-based companies — PowerChina International, Shenzhen Yantian Port Group and Rizhao Port Group. In addition, PowerChina International will pour investments into the Melaka Gateway project that has a gross development value of RM30 billion.

Nonetheless, some quarters believe the Melaka port may become China’s military base.

“Chinese investment in infrastructure, communications, energy, education and other non-manufacturing sectors will definitely help improve Malaysia’s quality competitiveness in relation to high-end manufacturing,” says MIER executive director Zakariah Abdul Rashid.

“But there are other political-economic dimensions to the massive investment in infrastructure by a single superpower that we’ve to be more concerned about as it affects not only the well-being of the present and future generations but also other strategic non-economic issues,” he adds.

During his six-day trip to China, Najib was quoted by China Daily as saying that former colonial powers should not lecture the nations they once exploited on their internal affairs. This was in response to critics that Putrajaya was getting too close to China.

He reminded the larger nations to treat “smaller countries fairly”.

“And this includes former colonial powers. It is not for them to lecture countries they once exploited on how to conduct their internal affairs today,” Najib reportedly said.

His efforts to strengthen ties with China have given rise to anxiety that Malaysia may become overly dependent on investments from the mainland.

“It would be naïve to believe such massive investments will not translate into significant political and economic control, especially given the almost total lack of transparency in most of these projects.

“At this rate, Malaysia may well find itself reduced to satrapy status within the emerging Chinese order with Bandar Malaysia being the new Chinese regional capital,” wrote Dennis Ignatius, a veteran of the Malaysian Foreign Service, in his essay published on New Mandala, an Australia-based news website.

Ignatius served in London, Beijing and Washington and was subsequently appointed ambassador to Chile and later to Argentina.

“Malaysia — vulnerable, exposed and ripe for exploitation as a consequence of the massive 1MDB scandal — is set to be the jewel in the crown of China’s ambitious regional agenda. In exchange for a Chinese bailout, significant national assets and lucrative contracts are being handed over to China in a series of murky deals,” he wrote.

 

Open economy

Economists do not deny that foreign investments are good for the country but they point out that being an open economy, Malaysia should have a diversified source of FDI.

To recap, when former prime minister Tun Dr Mahathir Mohamad adopted the Look East policy, Malaysia did not only have close ties with Japan, which was the economic superpower in the 1980s to 1990s before its asset bubble burst, but also with South Korea and Taiwan. As a result of diplomatic efforts with the Far East nations, Malaysia became a popular destination for them to set up manufacturing plants.

“The government has taken all factors into consideration in order to secure highly favourable terms for Malaysia with regard to the recent commitments between Malaysia and China during the prime minister’s visit. Take the loan for the ECRL project. Between taking a soft loan and issuing a sovereign bond, we have to take into consideration the cost of issuing [the bond] and currency fluctuations in today’s global economic climate,” Datuk Seri Wee Ka Siong, Minister in the Prime Minister’s Department, tells The Edge when asked to comment on Malaysian concerns about the terms of the loan agreements with China.

Wee explains that with a soft loan at a fixed interest rate and deferred repayment period, the government will be able to hedge the effects of the global economy. “As it is debt financing and not equity financing, the facility will not belong to a third party at the end of the day.

“China’s One Belt, One Road long-term trade initiative should be understood from the viewpoint that many projects are jointly undertaken by the government or private companies to create catalytic effects that will bring long-term trickle-down economic benefits to Malaysia,” he adds.

Public concern over the government’s move to raise debt to finance infrastructuring building may not be baseless, given that the country’s national debt has ballooned over the years, thanks to the budget deficit.

Malaysia’s national debt stood at RM643.6 billion and its off-balance sheet liabilities at RM180.9 billion. The drastic drop in crude oil prices has also been a wake-up call for Malaysia that the free flow of oil money cannot last forever.

Certainly, not all are against the influx of Chinese investments, given the view that good infrastructure will be a magnet for FDI. Furthermore, according to history, China is not a country that conquered other nations.

“If you study Chinese history, you’ll find that it never colonised countries in Southeast Asia. For over 600 years, China didn’t come and conquer this region like the Europeans did. It came here for trade and cultural exchange. I view our current relationship with China in this historical context. I don’t think China is out to colonise us or dominate our strategic industries. China’s outreach to Malaysia and Asean is part and parcel of President Xi Jinping’s One Belt, One Road initiative. I think it bodes well for us,” Sunway Group founder and chairman Tan Sri Jeffrey Cheah tells The Edge.

“The relationship between China and Asean, especially Malaysia, is at an all-time high, which augurs well for both countries and Asean,” he adds.

For Tan Sri Lee Kim Yew, patron of the World Chinese Economic Summit and former chairman and founder of the Malaysia China Business Council, any form of investment from China is welcome.

Nonetheless, Lee points out that the best option is for China to invest and share the risks. “If the country needs to take up loans to invest in [an  infrastructure] project, the government needs to ensure there are good returns [social and economic benefits],” he explains.